Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200 . Suppose that the farmer has the right to
compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?
a. The railroad will continue to operate but will pay the farmer $1,500 in damages.
b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.
c. The farmer will incur $1,500 in damages to his crops.
d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
b
You might also like to view...
How does expansionary monetary policy affect a nation's exchange rate?
What will be an ideal response?
Refer to the above table. Given the level of investment at $34 billion, zero net exports, and a lump-sum tax of $30 billion, the addition of government expenditures of $20 billion at each level of GDP will result in an equilibrium GDP of:
The data below is the consumption schedule in an economy. All figures are in billions of dollars.
A. $490 billion
B. $540 billion
C. $590 billion
D. $640 billion