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Question
Suppose there are two identical factories on a river. Both require clean water for their production processes. The upstream firm gets clean water from the river and dumps dirty water into the river. The downstream firm must clean the water it gets from the river before it can use the water and later it dumps dirty water into the river. In this situation
A) the private costs of the two firms are the same since both dump dirty water into the river.
B) the upstream factoryʹs private costs are lower than its social costs since it passes the costs of the dirty water on to the downstream firm. For the downstream firms, private costs equal social costs.
C) the private costs of the downstream firm are greater than the private costs of the upstream firm and the social costs are less than the private costs for both firms.
D) the private costs of the upstream firm are less than its social costs while the social costs of the downstream firm are less than its private costs.
Answer
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