Question

Plastics, Inc. and Joe's Canoe Shack both operate businesses located on the river. Plastics, Inc. dumps pollution into the river, which results in fewer canoe rentals for Joe. The marginal cost of cleaning up the pollution is $12,000 for Plastics, Inc. Joe estimates a reduction in pollution will lead to a marginal benefit of $20,000.
1. If Joe owns the rights to the river, which of the following is the most likely outcome? a. Plastics will pay Joe $15000 to pollute. b. Joe will pay Plastics $15000 not to pollute. c. Joe will enforce his property rights and not allow Plastics to pollute. d. Plastics will use its property rights to continue polluting.
2. If Plastics, Inc. owns the rights to the river, which of the following is the most likely outcome? a. Plastics will pay Joe $15000 to pollute. b. Joe will pay Plastics $15000 not to pollute. c. Joe will enforce his property rights and not allow Plastics to pollute. d. Plastics will use its property rights to continue polluting.

Answer 1

Answer:

1.- If Joe owns the rights to the river will enforce his property rights and not allow Plastics to pollute and clean the pollution. Plastic is breaking his rights on the river

In this scenario Joe has benefit for 20,000

and Plastic losses for 12,000

2.- If Plastic own the rights to the river Joe will pay Plastics $15,000 to not pollute. This will make Plastic earn money for cleaning the river and Joe gain 5,000 incremental benefit

Explanation:

(A) Joe has legal claims, so It will used before any economic options

(B) Joe doesn't have legal claims, but It notices that a good offer make both parties win.

Plastic will receive 15,000 dollars to clean the river, which has cost of 12,000 realizing a net gain of 3,000

While Joe estimated a marginal benefit of 5,000 after paying to Plastic to clean the river, (20,000 benefit - 15,000 cost)

Notice: the option for escenario (B) is also stands on (A) but because Joe has the legal rights on the river, it will try to make Plastic paid the pollution on the river and take the benefit completely for his own.