A local laundry advertises that clothes it washes smell "sunshine fresh" because it line dries everything outside. Then a steel factory moves in next door and emits black smoke which stains the clothes drying at the laundry. According to the Coase Theorem, granting the
a. steel factory the right to pollute would be efficient, but granting the laundry the right to clean air
would be equitable.
b. laundry the right to clean air would be efficient, but granting the steel factory the right to pollute would be equitable.
c. steel factory the right to pollute has the same effect on equity as granting the laundry the right to clean air.
d. steel factory the right to pollute
has the same effect on efficiency as granting the laundry the right to clean air.
would d be the correct answer?
Yes, option d would be the correct answer. According to the Coase Theorem, regardless of whether the right to pollute is granted to the steel factory or the right to clean air is granted to the laundry, the resulting allocation of resources would be economically efficient.
The Coase Theorem states that in the absence of transaction costs and when property rights are well-defined, parties can negotiate and reach an efficient solution regardless of the initial allocation of property rights. In this case, if the steel factory is granted the right to pollute, it would have an incentive to compensate the laundry for the damage caused by the pollution. On the other hand, if the laundry is granted the right to clean air, it could potentially negotiate with the steel factory to reduce its pollution or compensate for any damage caused.
Therefore, granting either party the right to pollute or the right to clean air would lead to an efficient outcome. However, the Coase Theorem does not necessarily address equity concerns, which refer to the fairness or distribution of resources.