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Question
Suppose there are two factories on a river, and both need clean water for their production processes. The upstream factory takes in clean water and dumps dirty water back into the river. The downstream firm must clean up the water it gets from the river before using it. In this situation,
A) the private costs of the downstream factory are more than the private costs of the upstream factory, but for both factories private costs and social costs are the same.
B) the social costs are greater than the private costs for the upstream firm, while the social costs are less than the private costs for the downstream firm.
C) the upstream factoryʹs private costs are less than its social costs, and its external costs are borne by the downstream factory.
D) the internal costs of the upstream factory are externalized by the downstream factory, which then passes them on to its customers.
Answer
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