The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The price of bananas is constant at $400. The government has differ... The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The price of bananas is constant at $400. The government has different options in order to reduce the output level down to the Pareto-efficient level of 38,000. At this point, the difference between the MSC and the MPC curves is $105. In which of the following options do the banana producers make the highest profit?

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Understand the Problem

The question describes a scenario involving banana production with negative externalities (pesticide use affecting fishermen). It presents a graph showing marginal private cost (MPC), marginal social cost (MSC), and price. The question asks which of the given options would maximize the banana producers' profit, considering the need to reduce output to the Pareto-efficient level.

Answer

Coasean bargaining when producers have the right to produce.

Coasean bargaining when the producers have the right to produce will result in the highest profit for banana producers.

Answer for screen readers

Coasean bargaining when the producers have the right to produce will result in the highest profit for banana producers.

More Information

Coasean bargaining allows the parties to negotiate an efficient outcome by internalizing externalities.

Tips

A common mistake is to misunderstand the Coase Theorem and its implications for bargaining outcomes. The distribution of property rights affects who receives the payments, but if transaction costs are low, an efficient solution can still be reached.

Sources

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