Suppose a Paper Mill Earns $1,000,000 in Profits When It

question 59

Multiple Choice

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $75,000.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.Suppose the law guarantees the farmer access to clean water from the river.Which of the following describes an efficient outcome in this case?

• A) The owner of the mill is unable to pay the farmer enough to secure his permission to pollute the river.
• B) The owner of the mill pays the farmer $87,500 for his permission to pollute the river.
• C) The owner of the mill pays the farmer $112,500 for his permission to pollute the river.
• D) The farmer pays the owner of the mill $87,500 to stop polluting.

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Definitions:

Supply

The total amount of a product or service that is available for purchase at a given price over a specific time period.

Perfectly Inelastic

A situation in demand where the quantity demanded does not change in response to changes in price.

Quantity Supplied

Quantity supplied is the amount of a good or service that producers are willing and able to sell at a certain price over a given period.

Price

The cost of buying a good or service, influenced by different elements like supply and demand dynamics.