A cement factory is located near a river which is also used for training sessions by a team of swimmers. When the factory dumps chemicals in the water, the river cannot be used for swimming. Experts estimate that it would cost $100,000 to install a purifying equipment that would completely eliminate the chemicals from the river. Moving the swimming team to train at a different location would cost $90,000 and thus the purifying equipment would not be necessary. 2.1. Identify the 2 externalities. 2.2. What result (theorem) can be applied to fix these externalities? Why might this theorem work in this case? 2.3. What solution would the two parties choose if the right to a clean river is granted to the swimming team and who would bear the costs of fixing the externality problem?
A cement factory is located near a river which is also used for training sessions by a team of swimmers. When the factory dumps chemicals in the water, the river cannot be used for swimming. Experts estimate that it would cost $100,000 to install a purifying equipment that would completely eliminate the chemicals from the river. Moving the swimming team to train at a different location would cost $90,000 and thus the purifying equipment would not be necessary.
2.1. Identify the 2 externalities.
2.2. What result (theorem) can be applied to fix these externalities? Why might this theorem work in this case?
2.3. What solution would the two parties choose if the right to a clean river is granted to the swimming team and who would bear the costs of fixing the externality problem?
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