Question

Soot is considered the second largest cause of global warming. It is emitted from a variety of sources, but most notably from vehicles. Damian owns a logistics company that has a very large fleet of diesel trucks. The Australian Government recently introduced legislation that charges companies based on the amount of emissions of their fleets that are above 5% soot. They can either opt to meet the 5% target and pay no permit cost (Process D), or purchase permits entitling them to pollute in excess of 5% (but this will also incur a cost to modify their fleet using Processes A, B, and C) Process Soot emissions (% Costs to modify Damian' fleet with Process (S thousand Permit cost (S thousand 10 900 100 300 700 100 500 a. Given the government's policy. the government believes that currently emissions of soot are too high. An economist would say that the current level of soot Type E for Efficient, NE for Not emissions results in less surplus than the optimal level. In other words, the market is currently: NE Efficient, O for exceeding the Opportunity cost or M for Maximising social benefits b. Imagine the government altered its goal and instead decided that only 60% of Damian's fleet had to be compliant with the 5% target. What would be the total cost to society be to ensure Damian's company complied with the Government's requirements? Answer in millions of dollars (rounded to two decimal places). million Type A, B, C, or D c. Given the cost of permits and costs to modify his fleet, what process will Damian prefer out of the four options?A

Answer 1

Total cost - [cost of compliance (cost to modify) + cost of permit]

In the scenario where emissions need to be brought down only for 60% of the fleet,

cost of compliance (i.e. cost to modify) is as follows -

A	B	C	D
0	60	420	540
(60% of 0)	(60% of 100)	(60% of 700)	(60% of 900)

If Government allows Damien to have only 60% of his fleet to comply with rules, then cost to Damien to modify process is 60% of what is given in the table in the question.

government's required target is 5%. to meet that requirement (D), total cost incurred under the 60% scenario is 540. in case of non compliance (A), total cost is 500. To ensure compliance at 5%, Damien must be indifferent to A and B for which cost of D must be equal to A. for that to happen society must incur the cost difference and compensate Damien (540-500=40). therefore cost to society to ensure compliance in the 60% scenario is 40 million dollars