Answer to Question #289847 in Microeconomics for Alemu

Question

A tannery firm established five decades before in a rural village has polluted a river used by 

local people for watering, fishing, cleaning and drinking. An organization working to protect 

human right verified the illegal action of the firm so that a local government can measurethe loss to farmers and take legal action accordingly. The punishment imposed by the local 

government is either to relocate the firm or pay compensation to victims to internalize the 

damage made so far and abate future pollution emissions to the socially optimal level of

pollution. The relocation costs the firm 100 million birr while the compensation and 

abatement costs it 75 million birr. The tannery firm goes for abatement and compensation.

Should the local government implement the policy change? Why? Does the policy change 

have Pareto improvement? Explain?

Answer 1

Solution:

Yes, the local government should implement the policy change.

This is because the policy change is very effective in ensuring that companies adhere to set rules and regulations required to keep society safe or protected from environmental damage.

 

Yes, the policy change has Pareto improvement.

A Pareto improvement is a system improvement in which a change in the allocation of goods harms no one while benefiting at least one person. The policy change will prevent the firm from hurting the community anymore, and at least some of the community members will benefit from the new policy change.