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Evaluating Policy Responses to Pollution
A factory's production process releases pollutants into a river, which provides a private benefit to the factory in the form of lower production costs. However, this imposes an external cost on a downstream town that relies on the river for its water supply. Consider two potential government responses:
- The government gives money to the town to help pay for advanced water purification technology.
- The government charges the factory a fee for each unit of pollutant it releases into the river.
Evaluate which of these two responses is more effective at addressing the fundamental economic problem described. Justify your reasoning by explaining how each policy affects the private benefits and external costs associated with the pollution.
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