Question:

Market Failure - Externality Question (Check Answer)?

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Consider a city with a river. The city has a resort whose visitors use the river for recreational purposes. The city also has a tannery that creates industrial waste, which it dumps into the river. This pollutes the river and makes it a less desirable vacation location. That is, the tannery's effluent decreases the resort's profits.

Suppose that the tannery can use a production method that includes water recycling. This would reduce the pollution in the river to levels that are safe for recreation and would no longer affect the resort. If the tannery uses the recycling method, the tannery's profits are $1,500 per week and the resort's profits are $1,700 per week. If the tannery does not use the recycling method, the tannery's profits are $2,000 per week and the resort's profits are $1,000 per week.

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  1. I think it is b, becuase the total social bebefit of using the recycling method is greater than not using it.

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