Evaluating a Policy Intervention at an Efficient Outcome
Imagine a factory and a fishery share a river. The factory's operations pollute the water, harming the fishery. Through negotiations, they have agreed on a level of factory production that maximizes their combined surplus. At this level, the profit the factory gains from its last unit of production is exactly equal to the cost of the damage that unit's pollution imposes on the fishery. A local politician, concerned about the remaining pollution, proposes a law to force the factory to reduce its output by an additional 10%.
Critically evaluate this proposal. Explain why further private bargaining to achieve this reduction would likely fail and justify whether the proposed law would increase or decrease the total economic welfare for the factory and fishery combined.
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Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
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Evaluating a Policy Intervention at an Efficient Outcome
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