4. A steel factory has the right to discharge waste into a river. The waste redu

Question

4. A steel factory has the right to discharge waste into a river. The waste reduces the number of fish, causing damage for fisheries. Suppose that the factory initially discharges 9 units of waste. Let X denotes the re- duction in the quantity of waste dumped. The marginal cost of reducing the waste, denoted MC, is given by the equation MC 2 +5X. The marginal social benefit (MSB) of reducing the waste is given by the equa tion MSB = 30-3X. a. Calculate the efficient level of waste reduction b. What is the efficier cause the firm to dump only an efficient quantity of waste? c. What would be the quantity dumped if the firm did not care about the fishery?

Explanation / Answer

Answer:

A.

For efficient Quantity of waste,

MD = MB

Or,

2+5X = 34-3X

8X = 34-2

X = 4

Thus, Efficient Quantity of waste = 4

B.

Efficient fee = 2+5*4 = 22

c.

If firm don’t care about the fishery, then

MB = 0

34-3X = 0

X = 34/3

X = 11.33

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