Maximizing the Net Benefits of Pollution
Read this section about how to apply the Coase Theorem to solve environmental problems.
12. Answer to Try It! Problem
The efficient quantity of pollution is four tons per week. At one ton of pollution, the marginal benefit exceeds the marginal cost. If the paper mill expands production, the additional pollution generated leads to additional benefits for it that are greater than the additional cost to the residents nearby. At five tons, the marginal cost of polluting exceeds the marginal benefit. Reducing production, and hence pollution, brings the marginal costs and benefits closer.
In the absence of any fees, taxes, or other charges for its pollution, the paper mill will likely choose to generate six tons per week, where the marginal benefit has fallen to zero.