Question

The Great Fracking Natural Gas company has just established a new well in the ranching community of Grassville, USA. It turns out that some of the chemical emissions used in the fracking process are contaminating the groundwater. The total damage to ranchers due to livestock losses from drinking the water is 50p2, where p is the level of pollution in this case. The total damage to families who must travel to town and purchase clean water each month is 300p2. The marginal savings (MEB) to Great Fracking for being allowed to pollute is 4000 – 40p.

a) What is the aggregate marginal damage to Ranchers and Families in Grassville?

b) Provide a graph including each of the marginal emissions damage and marginal emissions savings curves, with pollution (emissions) on the horizontal axis.

c) How much will Great Fracking pollute without regulation? What is the socially optimal level of pollution?

d) What is the marginal willingness to pay (MAB) for abatement of the Fracking pollution, using the unregulated amount of pollution as a start point?

e) What is the firm’s Marginal Abatement Cost, starting from the unregulated point? What is the socially optimal level of abatement?

f) Are the optimal provisions of pollution (part c) and abatement (part e) equivalent? Explain.

Answer 1

Figure 1