Nobody likes pollution (or crime, or accidents)! But economists, as they so often do, bring a different perspective to the issue of pollution. Assume that a paper plant dumps the chemicals it uses in making paper into the river it is located next to, polluting the river for downstream users. The paper plant operates in a perfetly competitive market ( the price it charges for its products equals its average total cost of production, not counting the costs of pollution, and it earns only a normal profit on its business.)
1) Who loses and who gains from the pollution caused by this plant?
2) Explain why the economist says that it doesn't make sense to reduce the amount of pollution to zero. What is the "optimal" amount of pollution?
3) The U.S. adopts strict pollution controls, forcing paper plants either to clean up their pollution or pay a heavy fine. But Canada refuses to adopt such a rule. What problem does this create?