Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality.

-Refer to the scenario above.If the property rights to the river belong to the firm,what is the maximum transfer between the two party necessary to make the firm produce the socially optimal quantity?
A) A payment of ((a c) f) ((b d) e) from the firm to Bob
B) A payment of ((a c) f) ((b d) e) from Bob to the firm
C) A payment of (a c) (f e)/2 from the firm to Bob
D) A payment of (b d) (f e)/2 from Bob to the firm

Question

Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality.
 
-Refer to the scenario above.If the property rights to the river belong to the firm,what is the maximum transfer between the two party necessary to make the firm produce the socially optimal quantity?
A) A payment of ((a c) f) ((b d) e) from the firm to Bob 
B) A payment of ((a c) f) ((b d) e) from Bob to the firm 
C) A payment of (a c) (f e)/2 from the firm to Bob 
D) A payment of (b d) (f e)/2 from Bob to the firm

Quizplus · Accepted Answer

DWhen the property rights to the river belong to the firm, Bob would need to compensate the firm to reduce its pollution to the socially optimal level. Choice B represents Bob paying the firm to adjust its activities, aligning with the Coase theorem where parties can negotiate to correct externalities if property rights are clearly defined. Choice D represents a similar concept, with Bob compensating the firm, but with a different formula potentially applicable under specific conditions not detailed in the scenario.

Scenario: the Following Figure Shows the Private Cost and Social