Question:
Consider a case of negative production externality, where \(MSC\) is marginal social cost, \(MPC\) is marginal private cost, and \(MPB\) is marginal private benefit. Assume that the property rights belong to the polluter. As per the Coase theorem, payment \((p)\) will be acceptable to both parties (i.e., polluter and the affected party) when
Consider a case of negative production externality, where \(MSC\) is marginal social cost, \(MPC\) is marginal private cost, and \(MPB\) is marginal private benefit. Assume that the property rights belong to the polluter. As per the Coase theorem, payment \((p)\) will be acceptable to both parties (i.e., polluter and the affected party) when
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Under Coase theorem, bargaining succeeds when compensation lies between the polluter’s minimum acceptable amount and the affected party’s maximum willingness to pay.
Updated On: Jun 5, 2026
- \[ (MSC-MPC)>p>(MPB-MPC) \]
- \[ (MPB-MPC)>p>(MSC-MPC) \]
- \[ (MPC-MSC)>p>(MPB-MPC) \]
- \[ (MPC-MPB)>p>(MSC-MPC) \]
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The Correct Option is A
Solution and Explanation
Step 1: Understand the negative production externality.
In a negative production externality, the producer (polluter) imposes external costs on others.
Therefore,
\[ MSC > MPC \] because social cost includes external damage in addition to private production cost.
Step 2: Understand Coase theorem with property rights assigned to the polluter.
If the polluter holds the property rights, then the affected party must compensate the polluter to reduce pollution.
For an agreement to occur, the payment \(p\) must satisfy two conditions simultaneously:
Polluter must receive at least the profit forgone and
Affected party will not pay more than the external damage avoided
Step 3: Determine the lower bound of payment.
The polluter’s forgone net gain from reducing production is
\[ MPB-MPC \]
Thus, the payment must exceed this amount:
\[ p>(MPB-MPC) \]
Step 4: Determine the upper bound of payment.
The affected party benefits from reduction in external damage equal to
\[ MSC-MPC \] Hence, they will agree only if
\[ p<(MSC-MPC) \]
Step 5: Combine the inequalities.
Therefore, acceptable payment must satisfy
\[ (MSC-MPC)>p>(MPB-MPC) \]
Step 6: Final conclusion.
Hence, the correct condition is
\[ \boxed{(MSC-MPC)>p>(MPB-MPC)} \]
Therefore, the correct option is (A).
In a negative production externality, the producer (polluter) imposes external costs on others.
Therefore,
\[ MSC > MPC \] because social cost includes external damage in addition to private production cost.
Step 2: Understand Coase theorem with property rights assigned to the polluter.
If the polluter holds the property rights, then the affected party must compensate the polluter to reduce pollution.
For an agreement to occur, the payment \(p\) must satisfy two conditions simultaneously:
Polluter must receive at least the profit forgone and
Affected party will not pay more than the external damage avoided
Step 3: Determine the lower bound of payment.
The polluter’s forgone net gain from reducing production is
\[ MPB-MPC \]
Thus, the payment must exceed this amount:
\[ p>(MPB-MPC) \]
Step 4: Determine the upper bound of payment.
The affected party benefits from reduction in external damage equal to
\[ MSC-MPC \] Hence, they will agree only if
\[ p<(MSC-MPC) \]
Step 5: Combine the inequalities.
Therefore, acceptable payment must satisfy
\[ (MSC-MPC)>p>(MPB-MPC) \]
Step 6: Final conclusion.
Hence, the correct condition is
\[ \boxed{(MSC-MPC)>p>(MPB-MPC)} \]
Therefore, the correct option is (A).
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