Suppose Erie Textiles Can Dispose of Its Waste "For Free

question 15

Multiple Choice

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below.  
Suppose you observe that Erie has not added a filter. You could conclude that the Coase theorem failed to solve the externality problem because:

• A)Erie's benefits to operating without a filter are greater than the benefits of a filter to the fishermen and bird watchers.
• B)negotiation with many individual fishermen and bird watchers was too costly.
• C)Erie has a property right to the river.
• D)regulators prevent application of the Coase theorem when the environment is at stake.

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Definitions:

Retained Earnings Restrictions

Limitations or constraints placed on the amount of retained earnings that can be used for distribution to shareholders, often due to legal, contractual, or company policy reasons.

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders, not considered a part of the float and not having voting power or dividend rights.

Long-term Debt Contracts

Agreements for borrowing funds that are to be repaid over a period longer than one year.

Weighted-average Shares

A calculation used in financial reporting to compute the average number of shares outstanding during a period, adjusting for any stock splits or dividend issues.