1. On the banks of the Great Fish River sit an oil refinery and a paper mill. Bo
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Question
1. On the banks of the Great Fish River sit an oil refinery and a paper mill. Both generate a water pollutant called gunk that kills fish, reducing the profits of local fishing boats. But it is costly for the mill and the refinery to clean up gunk. The Environment Ministry needs to step in with a solution. The tables below show the marginal and total costs to the polluters for clean-up, and also show the marginal and total benefits of clean-up to the fishing community GUNK Emitted Csts of Reduction Reduction (tons/day Toal Marginal Total Marginal T OIL REFINERY Costs of FISHERS Profit from Reduction PAPER MILL Mrginal $66.70 $16.70 $40.00 $26.70 $197.00 $50.00 $10.00 $13.30 $5.30 $40.00 $6.70 33.30 S4.70 $28.60 $3.60 $25.00 S2.80 22.20 $2.20 $20.00 $1.80 $18.20 $1.50 $16.70 $1.30 $15.40 $0.70 $1.00 $1.10 $1.40 $1.80 $2.20 $2.80 $3.40 $4.30 5.40 $6.70 $196.30 $8.00 2.30 $195.30 $5.70 $1.30 54.40 $0.80 $3.60 $0.50 $3.10 $0.40 S2.70 $0.30 2.40 $0.20 18 S2.10 $0.20 $1.90 $194.20 $192.80 $191.00 $188.80 5186.00 $182.60 $178.30 $172.90 8 9 10 There is a trick to reading this table. Recognize that the fishers' profits are a function of the total pollution in the system (gunk produced by the mill PLUS gunk produced by the refinery), while the table shows the clean-up costs to each polluter as a function only of their own waste (3 points) Suppose instead that the Ministry decides on a cap-and-trade system, limiting total pollution to seven units. And to compensate fishers for damages, the Ministry gives the fishers all seven permits, allowing them to either hold them or sell them. Thus, no pollution is allowed initially. With the refinery starting out holding zero permits, how much would the refinery be willing to pay to get one permit from the fishers? Similarly, the mill starts out with zero permits. How much would the mill be willing to pay the fishers to get one permit? Finally, how much would the fishers need to be paid to sell one permit to the refinery? To sell a second permit to the mill? c.Explanation / Answer
Government gave fishers all seven permits. Each permit allowing firms to emit 1 ton/day of pollution.
one permit = 1 ton/day
Refinery willing to pay to get one permit from the fishers = marginal cost of reduction for first ton of pollutant = $26.70.
Similarly,
Mills willing to pay to get one permit from the fishers = marginal cost of reduction for first ton of pollutant = $16.78
Fishers willingness to accept first permit to the refinery = marginal profit reduction for first ton of pollutant = $0.70
Fishers willingness to accept second permit to mill = marginal profit reduction for second ton of pollutant = $1
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