Alberta owns a nature preserve next to a coal mine. The mine produces dust that enters a stream on its land but which later flows through Alberta’s land. The dust in the stream does about $20,000 of damage to Alberta’s plants per year. The mine can clean up the dust before it reaches the stream for about $12,000 per year. Alberta offers them $15,000 per year to clean up the dust. What economic idea does this scenario exemplify and why?

Question

What will be an ideal response?

Answer 1

This is an example of the Coase theorem because of the existence of low transaction costs, clearly defined property rights, the internalization of an externalization, and the fact that the deal does not harm anyone and actually benefits both parties involved.