A local town is under pressure from voters to close a polluting factory

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A local town is under pressure from voters to close a polluting factory. The head of the homeowner’s organization argues that the pollution is a menace, and if the full external costs of the pollution were calculated, the factory would not be profitable. The homeowners calculate that the pollution generates an external cost of $3,000,000 per year in medical bills and $1,000,000 per year in suppressed property values, which reflects the difference in home prices with and without pollution. That factory makes a profit of $5,000,000 per year.

i.What is the external cost of the pollution?

ii.If the factory is forced to consider the total social costs of pollution, would it be profitable?

iii.How much could the town tax the factory before profits become zero?

iv. What does the Coase theorem suggest about negotiations between the town and the factory?