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. $$\begin{array} { | l | c | c | }
\hline & \text { With Filter } & \text { Without Filter } \
\hline \text { Gains to Erie } & \$ 200 & \$ 400 \
\hline \text { Fisherman } & \$ 180 & \$ 50 \
\hline \text { Bird Watchers } & \$ 130 & \$ 25 \
\hline
\end{array}$$ Suppose you observe that Erie has not added a filter. You could conclude that the Coase Theorem failed to solve the externality problem because:
A)Erie's benefits to operating without a filter are greater than the benefits of a filter to the fishermen and bird watchers.
B)negotiation with many individual fishermen and bird watchers was too costly.
C)Erie has a property right to the river.
D)regulators prevent application of the Coase Theorem when the environment is at stake.

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. $$\begin{array} { | l | c | c | } 
\hline & \text { With Filter } & \text { Without Filter } \
\hline \text { Gains to Erie } & \$ 200 & \$ 400 \
\hline \text { Fisherman } & \$ 180 & \$ 50 \
\hline \text { Bird Watchers } & \$ 130 & \$ 25 \
\hline
\end{array}$$ Suppose you observe that Erie has not added a filter. You could conclude that the Coase Theorem failed to solve the externality problem because:
A)Erie's benefits to operating without a filter are greater than the benefits of a filter to the fishermen and bird watchers.
B)negotiation with many individual fishermen and bird watchers was too costly.
C)Erie has a property right to the river.
D)regulators prevent application of the Coase Theorem when the environment is at stake.

Quizplus · Accepted Answer

Negotiation with many individual fishermen and bird watchers was too costly, which is a common reason for the failure of the Coase Theorem in solving externality problems.

Suppose Erie Textiles Can Dispose of Its Waste "For Free