# Why does the hotel pay the coal plant x amount

Question
1

Use
the graph below, in conjunction with the Coase Theorem, to answer the following
questions. Suppose a coal plant and a hotel are located on a
river. The hotel is downstream of the coal plant, so any pollution from
the plant directly affects the profits of the hotel. The graph below shows
the marginal pollution damages (MPD) for the hotel and the marginal pollution
control costs (MPCC) for the coal plant. Suppose the coal plant holds the
property right.

1)How
much will the hotel pay the plant per unit to clean up its pollution to
Q*?
The hotel will pay
P=[x]
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Question
2

Why
does the hotel pay the coal plant x amount (where ‘x’ is your response from the
previous question) per unit?

a.

Because
xMPD.

c.

Because
there is no efficient level of pollution.

d.

Because
x=MPCC.

Question
3

1)What
is the hotel’s net gain by paying the plant to clean up pollution? Use the
letters in the graph to determine the area of net gain to the hotel. (Example
Area = A or Area = A+B)
Area = [x]
Question
4

Why
would the plant accept payment = x/per unit to clean up pollution to level Q*?

a.

Because
xMPD.

c.

Because
there is no efficient level of pollution.

d.

Because
x>MPCC.

Question
5

1)What
total payment does the plant receive for this clean up? Use the letters in the
graph to determine the total payment (Example: Area = A or Area = A+B).
Area = [x]

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