Homework SourseConsider the situation where firm y is downriver from firm x
Consider the situation where firm y is downriver from firm x and must cope with the pollution created by production of x output. According to the Coase theorem, which of the following statements is correct? Explain your answer.
If firm x must purchase, from firm y, rights to pollute the river they share, firm x’s profit maximizing production decision will lead to the (socially) efficient equilibrium.
If firm y must purchase, from firm x, rights to pollute the river they share, firm x’s profit maximizing production decision will lead to the (socially) efficient equilibrium.
Which firm the pollution rights are initially assigned to, firm y, or firm x, is irrelevant to reaching the (socially) efficient equilibrium.
All of the above.
| a. | If firm x must purchase, from firm y, rights to pollute the river they share, firm x’s profit maximizing production decision will lead to the (socially) efficient equilibrium. | |
| b. | If firm y must purchase, from firm x, rights to pollute the river they share, firm x’s profit maximizing production decision will lead to the (socially) efficient equilibrium. | |
| c. | Which firm the pollution rights are initially assigned to, firm y, or firm x, is irrelevant to reaching the (socially) efficient equilibrium. | |
| d. | All of the above. |
Solution
D.All of the Above
As coase theoram says there is just need of property rights to be defined, regardless of how property rights are divided, is enough to reach efficient equlibrium.
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