Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 18

Suppose that in problem 3.1, the law gave the brewer the right to dump yeast in the stream. Assuming that the conditions of the Coase theorem are met, the Coase theorem suggests that _____.
A) The brewer will pay the water bottler for the right to dump yeast in the river
B) The brewer will dump yeast, and there's nothing the water bottler can do about it
C) The water bottler will have the police stop the brewer from dumping yeast
D) The water bottler will pay the brewer not to dump yeast in the river
Problem:
Suppose that a brewer regularly dumps used yeast into a river and that a downstream water bottler must clean up the water before using it. Dumping the yeast into the river saves the brewer $500 in disposal costs each day. Cleaning up the water costs the bottler $600 each day. In this case, the benevolent social planner would _________.
A) Like to see the brewer pollute
B) Like to see the brewer dispose of the yeast somewhere other than the river
C) Strongly encourage the government to pass a law giving the brewer the right to pollute the river
D) We don't have enough information to determine what the benevolent social planner might want.