-The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.As long as someone owns the lake and the two parties can negotiate,then
A) the beach shuts down and the chemical firm produces 1 ton of pollution.
B) the beach shuts down and the chemical firm produces 2 tons of pollution.
C) the beach operates and the chemical firm produces 1 ton of pollution.
D) the beach operates and the chemical firm produces 2 tons of pollution.

Question

-The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.As long as someone owns the lake and the two parties can negotiate,then
A) the beach shuts down and the chemical firm produces 1 ton of pollution. 
B) the beach shuts down and the chemical firm produces 2 tons of pollution. 
C) the beach operates and the chemical firm produces 1 ton of pollution. 
D) the beach operates and the chemical firm produces 2 tons of pollution.

Quizplus · Accepted Answer

This scenario is an example of the Coase Theorem, which states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, the efficient outcome is likely where the chemical firm produces less pollution (1 ton) to allow the beach to operate, as this maximizes overall welfare by reducing the negative externality of pollution while still allowing both businesses to operate.

-The Above Figure Shows the Payoff Matrix for Two Firms