Marissa owns a small cottage by the lake. Big Boy’s Sawmill is next door, and it dumps sawdust into a sinkhole it owns. Unfortunately for Marissa, the sinkhole opens into a brook on her land, which gets clogged by the sawdust. It costs Marissa $3,000 per year to clean up the sawdust. Big Boy’s can dispose of the sawdust by having it hauled away for $2,000 per year. Marissa offers to pay Big Boy’s $2,500 per year to have the sawdust hauled away. In this example of the Coase theorem, what is the annual pecuniary cost to society of negative externality before any transaction occurs between Marissa and Big Boy’s?
a. $2,000
b. $2,500
c. $3,000
d. $5,000
c. $3,000
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Some people prefer more risky projects than less risky projects. But some people prefer less risky projects to those that are more risky. What explains this behavior?
What will be an ideal response?
Which trade theory has these implications: (1) nations may benefit from trade even when they do not differ in resource endowments or technology; and (2) specialization allows for scale economies and lower production costs?
What will be an ideal response?