Answer to Question #278317 in Microeconomics for Nae

Question

A cement factory is located near a river which is also used for training sessions by a team of swimmers. When the factory dumps chemicals in the water, the river cannot be used for swimming.  Experts estimate that it would cost $100,000 to install a purifying equipment that would completely eliminate the chemicals from the river. Moving the swimming team to train at a different location would cost $90,000 and thus the purifying equipment would not be necessary.

2.1. Identify the 2 externalities. (1 point)

 

2.2. What result (theorem) can be applied to fix these externalities? Why might this theorem work in this case? (1 point)

2.3. What solution would the two parties choose if the right to a clean river is granted to the swimming team and who would bear the costs of fixing the externality problem? Briefly explain. (1 point)

 

Answer 1

1.Water purification costs, including treatment and inspection, are a burden on municipal budgets. Securing reliable and uncontaminated water sources requires large investments in infrastructure

2.Damage to recreational facilities, particularly in that riverThis can be evaluated by loss of attendance and in rent values

2.2 The company should find another disposal area for its chemicals

The river should be purified

2.3: The company would be liable for the purification