Stinky Inc. has a factory which emits air pollutants which could have long-term

Question

Stinky Inc. has a factory which emits air pollutants which could have long-term effects on the environment and also smell terrible. This reduces the values of surrounding property. Stinky has estimated that the cost of installing anti-pollution devices is $500,000. Fines are imposed by the EPA for exceeding limits on certain types of emissions but these are only $1,000 per year. Considering liability rules, transaction costs and information availability, analyze the optimality of installing the anti-pollution devices.

Explanation / Answer

Stinky Inc. would not be likely to invest in the anti-pollution devices because any customer is unlikely to have sufficient damage to have a lawsuit and also air pollution can be contributed by many sources. Hence, there will be low chances of lawsuit and also substantial damage causing by it.

Also government regulation is not strong enough. Hence, investment in safety will be pretty low.

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