The table below shows four firms, the amount each pollutes, the marginal cost fo
ID: 3182815 • Letter: T
Question
The table below shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution.
Firm
Total discharge in tons
Marginal cost of clean/ton
Total cost of cleanup
A
60
$5
$300
B
70
$8
$560
C
80
$7.50
$600
D
90
$4
$360
The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes.
Refer to the table above to answer the next 4 questions. If the goal of the government is to reduce pollution by 50%, the cheapest way would be to have: which firm(s) to stop discharging?
b. Assume that these firms want to maximize profits. If the government wishes to cut discharge by 50%, it could do so by establishing an effluent fee of $5.50. Why? Explain.
c. If the government establishes a regulation requiring each company to reduce pollution by 50%, what would be spent on reducing pollution?
d. Suppose that the government gives each company a pollution permit equal to 50% of its present discharge. However, companies are allowed to reduce pollution more than 50% and sell their permit or reduce less than 50% and buy a permit from another company. The market price of the permits should be between $5.00 and $7.50. If firms maximize profits, what would happen? Explain your answer. Not just pick an answer.
A) Each firm would reduce pollution by 50%.
B) Firms A and D would eliminate pollution and sell their permits to B and C, who would continue to pollute as before.
C) Firms B and C would eliminate pollution and sell their permits to A and D, who would continue to pollute as before.
D) There is not enough information to answer this question.
Firm
Total discharge in tons
Marginal cost of clean/ton
Total cost of cleanup
A
60
$5
$300
B
70
$8
$560
C
80
$7.50
$600
D
90
$4
$360
Explanation / Answer
Answer:
Based on the information provided, total discharge = 300 tons
a) Since the marginal cost of company A and D is least and together they account for 50% of the total discharge generated, therefore the cheapest way would be to stop firms A and D from discharging.
Discharge by A and D = 60+90 = 150 tons = 50% of total 300 tons
b) if the effluent fees is set at $5.50, then this value is more than the actual cost to treat discharge from A and D. Moreover this $5.50 fee is less than the fee to treat discharge from B and C. Therefore at this value of the fees, A and D would treat the discharge at their own cost and B and C would prefer to get it treated by paying the fee amount. Therefore this fee amount would promote all the companies to cut discharge.
c. Spent on reducing pollution by 50%
Cost of reducing 50% discharge by A = $300/2 = $150
Cost of reducing 50% discharge by B = $560/2 = $280
Cost of reducing 50% discharge by C = $600/2 = $300
Cost of reducing 50% discharge by D = 360/2 = $180
Total cost of reducing 50% discharge by all companies = (150+280+300+180) =910$
d. If the cost of permit is set between $5.0 and $7.5 then this cost is more than the clean-up cost for company A and D, and in this case A and D would prefer to buy this permit, clean up the pollution on their own and sell the permit to other companies. For company B and C cost of purchasing the permit from A and D will be less and therefore these would purchase the permit from A and B and continue to pollute.
So answer is B) Firms A and D would eliminate pollution and sell their permits to B and C, who would continue to pollute as before.
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