Question

A battery acid producer pollutes the water upstream from the Polar Bear Club, a swimming club. If transactions costs are low, the quantity of pollution will be efficient

A) only if Ronald Coase is a member of the Polar Bear Club.
B) only if Ronald Coase is not a member of the Polar Bear Club.
C) only if water property rights are assigned to the producer.
D) only if water property rights are assigned to the Polar Bear Club.
E) if water property rights are assigned either to the producer or to the Polar Bear Club.

Answer 1

The quantity of pollution will be efficient if water property rights are assigned to either the Polar Bear Club or the producer, as they can negotiate to reach an efficient outcome.

Step-by-step explanation:

The scenario presented involves a classic example of an externality where a battery acid producer's actions are affecting the Polar Bear Club due to water pollution. According to Coase Theorem, the allocation of property rights is crucial in such situations.

If transaction costs are low, it does not necessarily matter to whom the property rights are assigned; what is important is that these rights are well-defined and tradable. Hence, the quantity of pollution will be efficient if water property rights are assigned either to the producer or to the Polar Bear Club. The key is that once property rights are assigned, both parties can negotiate to reach an agreement that reflects the true cost of pollution and leads to an efficient outcome.