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

question 12

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 $120,000.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 there is no law preventing the firm from polluting 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 farmer is unable to pay the owner of the mill enough to get him to stop polluting.
• C) The owner of the mill pays the farmer $110,000 for his permission to pollute the river.
• D) The farmer pays the owner of the mill $90,000 to stop polluting.

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Definitions:

Natural Scarcity

A situation where resources are limited in availability due to natural conditions, not enough to meet unlimited human wants.

Usury Laws

Usury Laws are regulations governing the interest rate that can be charged on a loan, designed to protect consumers from excessively high rates.

Free Market

An economic system where prices for goods and services are determined by the open market and consumers, in which the laws and forces of supply and demand are free from any intervention by a government or other authority.

Entrepreneur

An individual who, instead of working as an employee, runs a small business and assumes all the risks and rewards of a given business venture.