Question

A firm can produce steel with or without a filter on its smokestack. If it produces without a filter, the external costs on the community are $ 500,000 per year. If it produces with a filter, there are no external costs on the community, and the firm will incur an annual fixed cost of $ 300,000 for the filter. Use the Coase Theorem to answer how costless bargaining will lead to a socially efficient outcome, if the property rights are owned by the community. A. the community will have an incentive to pay the firm some price above $ 300,000 (perhaps $ 499,999) to induce the firm to install the filter. B. The firm would install the filter at a cost of $ 300,000. C. the socially efficient outcome is for the firm to not install the filter

Answer 1

Answer:  B. The firm would install the filter at a cost of $ 300,000.

Explanation:

If the community owns the property rights, they would be able to demand that the firm pay the external cost of $500,000 per year.

If on the other hand the company installed a filter, it would cost them $300,000 but then they would not have to pay the community the $500,000.

The lower cost option would be to install the filter for $300,000 which is what the firm would do.