A firm discharges phosphorus into the Altamaha River. The total abatement cost i

Question

A firm discharges phosphorus into the Altamaha River. The total abatement cost is: TAC -2A+0.1A2. A is the units of standard at 50 units. Firms do have the flexibility of either abating or paying the effluent fee in order to meet the standard. Assume firm will choose abating instead of paying effluent fee if the firm is indifferent between these two options. The firm's total cost of meeting the 50 units of abatement would be cost and the effluent fee wherever applicable. Total cost may include abatement O 1) $200 O2) $190 O 3) None of the other answers are correct. O 4) $140 O 5) $180 O 6) $155

Explanation / Answer

The decision to abate how much units of pollution involves marginal cost. MAC is 2 + 0.2A and fine is $4 per additional unit of pollution. Hence optimum abatement is MAC = 4

If MAC > 4, it is better to pay fine, if MAC < 4, it is better to abate and when MAC =4, we find the indifference

2 + 0.2A = 4

A = 10.

Cost of abatement = 2*10 + 0.1*100 = 30. Cost in fines = (50 - 10)*4 = 160. Total cost is 160 + 30 = 190. Correct answer is 190

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