Answered: The town of Cleanville lies next to a…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

The town of Cleanville lies next to a lake, which the residents of the town use for fishing, boating, and other recreational activities. Last year, two firms, Filth Inc. and Sludge Inc., built factories on the other side of the lake and have been dumping trash into it. Although some of the trash will dissipate naturally, the amount of trash the two firms emit is too much for the lake to handle. Right now, each firm dumps 40 pounds of trash in the lake each year (total of 80 pounds). Environmental scientists in Cleanville estimate that the lake can handle only 30 pounds of trash per year. The table below reports the marginal costs to the two firms of reducing trash. The marginal cost numbers tell us how much it would cost to reduce the marginal five pounds of trash. Therefore, Filth Inc.'s marginal cost of reducing the first 5 pounds is $2,000 and the next 5 pounds $4,000. Therefore, the total cost to reduce 10 pounds is $6,000. Suppose the city council agrees with the scientists' estimates and orders each firm to reduce trash by 25 pounds. The total cost to reduce this amount of trash is $ . Part 2. Suppose that after taking your economics course you visit Cleanville and hear about the city council's solution to reducing the trash. You think to yourself, “Haven’t these people learned some basic economics and the Coase theorem?" You gather some data, crunch some numbers, and go to the next city council meeting. You tell them that they should give each firm three permits. Each permit allows the firm to emit 5 pounds per year. Each firm can therefore emit 15 pounds per year, which means they would have to reduce the amount of trash they emit by 25 pounds. One of the council members raises his hand and asks, "But that's what our proposal does. How is yours any different?" You answer, "What makes my proposal different is that we allow the firms to buy or sell these permits." The city council is amazed at your insight and comments how much you learned in your econ class. They realize that after your proposal has been put into place, the total cost of getting rid of the 50 pounds of trash will fall to $ , the lowest total cost possible. Suppose Part 3. Let's see how the drop in total costs will come about. Filth inc. And sludge inc. Each start with three permits. If a firm does not buy a permit or sell one of it's permits, it would need to reduce trash by 25 pounds. If it sells a permit, it would have to get rid of more trash, and if it buys a permit, it would have to get rid of less. Hector sludge, the owner of sludge inc, calls Jordan filth and tells her he has an offer she can't refuse “I will buy one of you're permits for $14000.”

Filth Inc's marginal costs
(in $1,000s)
2
4
6
8
10
12
14
16
Sludge Inc.'s marginal
(in $1,000s)
7
10
13
16
19
22
25
28

Pounds reduced
5
10
15
20
25
30
35
40
Filth Inc.'s marginal cos
(in $1,000s)
8
10
12
14
16
2
4
6

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions