Asarta Inc. is polluting into a nearby fishing stream; doing so benefits them $40,000 a year.

Asarta Inc. is polluting into a nearby fishing stream; doing so benefits them $40,000 a year. The fishermen are unhappy as their trout are dying off. Typically, the fishermen can catch trout and sell it to a local market where they can earn about $8,000 a year. Currently, Asarta Inc. has the rights to use the stream as they see fit. Which of the following is an optimal solution according to the Coase Theorem?

Multiple Choice

Asarta Inc. could pay the fishermen $8,500 and keep polluting

Asarta Inc. could pay the fishermen $7,000 and keep polluting

There is no optimal solution given the current property rights

The fishermen cout The fishermen could pay Asarta Inc. $4,000 to stop them

Expert Solution

The fishermen sell the fish for $8,000 a year at local market.

Due to pollution emitted by company into stream, their catch is dwindling and also their income.

However, the property rights to use the stream is with company.

The company benefits from usage of stream to the tune of $4,000 a year.

In such scenario, if company compensates the fishermen for any amount between $8,000 and $40,000 then, in that case, optimal solution to the problem can be achieved in absence of any other transaction cost as per the Coase Theorem.

So,

Asarta Inc. could pay the fishermen $8,500 and keep polluting.

Hence, the correct answer is the option (1).

Rahul Sunny answered 2 years ago

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