Asarta Inc. is polluting into a nearby fishing stream; doing so benefits them $40,000 a year. The fishermen are unhappy as their trout are dying off. Typically, the fishermen can catch trout and sell it to a local market where they can earn about $8,000 a year. Currently, Asarta Inc. has the rights to use the stream as they see fit. Which of the following is an optimal solution according to the Coase Theorem?Multiple ChoiceAsarta Inc. could pay the fishermen $7,000 and keep polluting.Asarta Inc. could pay the fishermen $8,500 and keep polluting.The fishermen could pay Asarta Inc. $4,000 to stop them from polluting.There is no optimal solution given the current property rights.
Question
Asarta Inc. is polluting into a nearby fishing stream; doing so benefits them 8,000 a year. Currently, Asarta Inc. has the rights to use the stream as they see fit. Which of the following is an optimal solution according to the Coase Theorem?Multiple ChoiceAsarta Inc. could pay the fishermen 8,500 and keep polluting.The fishermen could pay Asarta Inc. $4,000 to stop them from polluting.There is no optimal solution given the current property rights.
Solution
The Coase Theorem suggests that as long as property rights are clearly defined, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, Asarta Inc. has the rights to the stream and it benefits them 8,000 a year due to the pollution.
The optimal solution, according to the Coase Theorem, would be for the party that values the resource the most to end up with it. In this case, Asarta Inc. values the stream more (8,000). Therefore, the optimal solution would be for Asarta Inc. to compensate the fishermen for their loss.
Looking at the options, the one that makes the most sense is "Asarta Inc. could pay the fishermen 8,500) is less than the benefit they get from polluting the stream ($40,000).
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