Suppose that a brewer regularly dumps used yeast into a river and that a downstream water bottler must clean up the water before using it. Dumping the yeast into the river saves the brewer $500 in disposal costs each day. Cleaning up the water costs the bottler $600 each day. Now suppose that the law gave the brewer the right to dump yeast in the stream. Assuming that the conditions of the Coase theorem are met, the Coase theorem suggests that

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Business

Tiara

1 November, 17:46

Suppose that a brewer regularly dumps used yeast into a river and that a downstream water bottler must clean up the water before using it. Dumping the yeast into the river saves the brewer $500 in disposal costs each day. Cleaning up the water costs the bottler $600 each day. Now suppose that the law gave the brewer the right to dump yeast in the stream. Assuming that the conditions of the Coase theorem are met, the Coase theorem suggests that

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Danica Fritz · Answer 1

The water bottler should pay the brewer company an amount of money that is higher than $500 but lower than $600.

Explanation:

Under the Coase Theorem, parties must negotiate a mutually beneficial agreement without considering the original distribution of property rights.

This means that the water bottler will try to lower its cleaning costs, and the brewer is not willing to pay any of the $500 cost to clean the water. But if the water bottler offers the brewer more than $500 for it to clean the water, they will take the money since it would generate them a profit. And as long as the money given to the brewer is less than $600, the water bottler will be saving money. This way both will win.