3. A factory is located next to a farmer, and sometimes emits pollution that dam

Question

3. A factory is located next to a farmer, and sometimes emits pollution that damages the farmer’s crops that are adjacent to the factory. The crop damage can be reduced if the factory installs a scrubber, if the farmer moves her crops, or both. The following table summarizes the cost of the various possible actions, and the crop damage, if any:

Action Crop Damage ($) Farmer’s cost ($) Factory’s Cost ($)

No action 100 0 0

Farmer moves crops 40 10 0

Factory installs scrubber 25 0 30

Farmer moves crops and factory installs scrubber 0 10 30

Explanation / Answer

no action will lead to damage of $100 whereas action on the part of farmer will decrease the loss by 60 at the cost of 10 . so net benefit to farmer of 50

only action on the part of factory owner will lead to benfit to farmer of 75( due to decrease in loss) , cost to factory owner of 30. factory doesn't have incentive to install scrubber , unless govt puts any obligation to do so or charge tax from him and install scrubber

if both farmer and factory owner takes action, pollution will be fully contralled at cost of 40 to society , gain to society will be 100 ( net gain= 60_)

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