Microeconomics Quiz
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MARKET FAILURE, EFFICIENCY & PUBLIC POLICY
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A cattle ranch is located upstream from a commercial fishery. The ranch's operations pollute the river, reducing the fishery's profits by $8,000 per year. The ranch could install a filtration system for $5,000 per year, which would eliminate the pollution. Alternatively, the fishery could install a water purification system for $3,000 per year, which would also negate the damage. Transaction costs are negligible.
Assume the ranch has the legal right to pollute. According to the Coase theorem, which of the following outcomes is most likely?
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