Question

A clothing manufacturer is located downwind from a steel plant. The steel plant emits pollution that causes $70,000 worth of damage per year to fabric used by the clothing manufacturer. The pollution could be eliminated by smokestack scrubber which would cost the steel firm $50,000 per year. Since this pollution causes no other damage it is not illegal and the steel plant does not now use the scrubber. Is this an efficient outcome? Explain. Is there any other solution to this problem other than government intervention? Explain.

Answer 1

A clothing manufacturer is located down wind from a steel plant. But the steelplant emits pollution that causes $70, 000 worth of damage per year to fabric used by the the clothing manufacture. Steel plant creates a production negative externality to the cloth manufacture. The pollution could be eliminated by smokestack scrubber which would cost steel firm $50, 000 per year. Even If this pollution causes no other damage, and it is not illegal, but it affect the production of cloting manufcature. It will reduce the output of clothing msnufacturer due to the damage caused to its fabric that is used for manufacturing clothes. If the steel does not use the scrubber to reduce the damage caused to fabric due to its production, it would not produce an efficient outcome.
Yes there is other solution to this problem other than government intervention.
By assigning properth rights either to steel plant or to clothing manufacture, we can reduce the negative externality that affect the clothing manufacture due to the pollution creates by steel plant production
Suppose we have given property rights to steel plant. Now the steel plant is producing inefficient outcome. Because it emits pollution and that affect the fabric used by clothing manufacturer. So either steel plant install smokestack scrubber or reduce his outcome to an efficient one
So the clothing manufacture should pay a certain amount of money to purchase smokestack scrubber for steel plant or pay an amount of money more than that he incur loses when he reduce his output to reduce pollution. It will reduce the pollution by internalising the negative externality
If we assign property rights to clothing manufacturer, he will force the steel plant owner to install smokestach scrubber. Otherwise the steel plant shoukd give a certain amount of money to clothing manufacture when producing each unit of output. It will force him to reduce its output and pollution.