Question TWO

In Rufunsa district of Lusaka province, Government has just acquired a new strategic investor to harness the recently discovered gold deposits. This is arguably a mining activity whose production process entails the discharge of pollutants in the nearby streams and into the Kafue River. Such discharges are likely to contaminates the natural habitat and may result into lower fish stocks and hence the livelihood of the Fishermen along the banks of the Kafue river and surrounding areas. Using the story answer the following questions;

1. Using a diagram explain the type of externality that the activities of the new investor will cause. [10 Marks]
2. Explain using a diagram how assignment of property rights can help deal with this externality. State the limitations of the Coase theorem in dealing with this problem especially in this context. [15 Marks]