Maximizing the Net Benefits of Pollution

Read this section about how to apply the Coase Theorem to solve environmental problems.

10. Try It!

The table shows the marginal benefit to a paper mill of polluting a river and the marginal cost to residents who live downstream. In this problem assume that the marginal benefits and marginal costs are measured at (not between) the specific quantities shown.

Plot the marginal benefit and marginal cost curves. What is the efficient quantity of pollution? Explain why neither one ton nor five tons is an efficient quantity of pollution. In the absence of pollution fees or taxes, how many units of pollution do you expect the paper mill will choose to produce? Why?

Quantity of pollution (tons per week)
Marginal benefit Marginal cost
0 $110 $0
1 100 8
2 90 20
3 80 35
5 60 150
 6  0  300