Policy Choice for Externality Correction
A manufacturing plant's operations pollute a nearby river, causing an estimated $200,000 in annual damages to a downstream agricultural business. A regulator is considering two distinct policies to address this issue, both of which are projected to reduce the plant's profits by the same amount.
- Policy A: The government imposes an annual tax of $200,000 on the manufacturing plant.
- Policy B: The government mandates that the manufacturing plant pay the agricultural business $200,000 annually as direct compensation for the damages.
From the perspective of the agricultural business, which policy is preferable and why? Justify your choice by comparing the final financial position of the agricultural business under each policy.
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