Question

Assume that locating a cement factory in the middle of Boston would save the producer $5 million at a public expense, in pollution and traffic noise, of $20 for each of 500,000 Boston residents. 1. What is the minimum amount that Boston residents would have to pay to stop the plant from being built if the owner has a legal right to build

Answer 1

$5 million

Step-by-step explanation:

If we follow the Coase Theorem, the appropriate solution to this case should be obtained regardless of initial rights. In this case, the factory saves $5 million to the producer, but it costs $10 million to Boston residents. if Boston residents pay $5 million or more to the factory owner, then both would benefit. Boston residents will gain $10 - $5 = $5 million, as well as the factory owner.