Question

(Total: 36 pts) Suppose a chemical factory discharges waste product into a river resulting in significant damages to a local fishery. The marginal damage to the fishery (measured in terms of the value of lost fish stocks) is represented by the equation: MD = 10E The chemical factory can reduce its effluent flows by treating its waste products. Its marginal abatement cost (MAC) function is given by the equation: MAC = 1,200 - 5E.
a) (8pts) What level of emissions will occur if the chemical factory is not regulated? What would the total abatement costs for the chemical factory be if emissions are controlled and reduced to zero?
b) (4pts) If no liability laws are in place, what damages will the chemical factory inflict on the fishery?

Answer 1

Solution: Given MAC = 1200 - SE Mo = 10E level of emissions will occur if chemical factory is not regulated : in the absence of regulation, marginal Abatement cost =o. MAC=0 - 1900-5E =0 E = 1200/5 E = 240 In the absence of regulation, Emilsin = 2 younits Total abatement cost of 240 units of emissions were abated = area under the mac care. TAc = || - Cao * 30o) = 8 V1000)

If no liability pre in place, damages will chemical factory inflict on fishery: with no liability cause, company will emit 240 units of emissims. · At this unit of emission, total damages will be equal to area under moe care. Total damage cost from chemical company is = 4(240*2400) =(8288000]