Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | }
\hline & \text { With Filter } & \text { Without Filter } \
\hline \text { Gains to Erie } & \$ 200 & \$ 400 \
\hline \text { Fisherman } & \$ 180 & \$ 50 \
\hline \text { Bird Watchers } & \$ 130 & \$ 25 \
\hline
\end{array}$$ If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter?
A)No, because it makes $200 less in profit with the filter.
B)Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter.
C)No, because use of a filter would result in smaller total economic surplus.
D)Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Question

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } 
\hline & \text { With Filter } & \text { Without Filter } \
\hline \text { Gains to Erie } & \$ 200 & \$ 400 \
\hline \text { Fisherman } & \$ 180 & \$ 50 \
\hline \text { Bird Watchers } & \$ 130 & \$ 25 \
\hline
\end{array}$$ If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter?
A)No, because it makes $200 less in profit with the filter.
B)Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter.
C)No, because use of a filter would result in smaller total economic surplus.
D)Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Quizplus · Accepted Answer

If Erie Textiles takes the filter, Erie's gains will decrease by $200 but the combined losses of bird watchers and fishermen will decrease by $135 ($180 - $130 + $50 - $25). Since the net gain of Erie Textiles will be $400 - $200 = $200 and the combined net gain of fishermen and bird watchers will be $135, the total net gain will be $335, which is greater than the net gain from not using the filter, which is $400. Therefore, Erie Textiles would choose to use the filter.

Suppose Erie Textiles Can Dispose of Its Waste "For Free