Evaluating Competing Claims on Externality Correction
A factory's production process pollutes a nearby river, imposing costs on a downstream fishing cooperative. The government intervenes, forcing the factory to reduce its output from the unregulated, profit-maximizing level to the lower, socially efficient level.
A factory spokesperson argues: "This policy is a net negative. Our lost profits from the reduced production are a significant blow to the local economy." A representative for the fishing cooperative counters: "This policy is a major success. The reduction in pollution has provided us with a huge benefit by restoring the fishery."
Critique these two positions from an overall societal welfare perspective. In your response, explain how it is possible for the total monetary gain experienced by the fishing cooperative to be greater than the total profits lost by the factory. Use the economic concepts of market price, marginal private cost, and marginal social cost in your explanation.
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