Question

Suppose the production of electricity by a utility generates pollution that harms others. suppose also that coase bargaining loading...can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. how would making the utility legally liable for the damages from its pollution affect pollution​ reduction?

Answer 1

Answer: Not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.

Explanation:

Externality exits when one persons action affects others who are not engaged in the activity. In such situations the optimal amount of the good (externality) is determined at the point where the marginal benefit is equal to the marginal cost. When the utility is made liable for the damages it does not affect the marginal benefit or marginal cost of pollution reduction. Thus, making the utility legally liable will not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.