5. Suppose a chemical factory discharges waste products into a river resulting i

Question

5. Suppose a chemical factory discharges waste products 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: 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 = 2,400-10E. (a) 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) If no liability laws are in place, calculate and explain what damages will the chemical factory inflict on the fishery? (c) If the government puts in place a liability law that requires the chemical factory to compensate the fishery for the damages it causes, what level of emissions will take place and what are the total costs of compliance for the chemical company? Explain your answer. (d) If the chemical factory has the property right to use the river what bargaining will result in the socially efficient equilibrium? What are the net gains experienced by eaclh party? Explain your answer

Explanation / Answer

a) In the absence of regualtion,Marginal Abatement cost = 0

MAC=0=2400-10E

E=2400/10 = 240

In the absence of regulation,emission will be = 240 units

Total abatement cost of 240 units of emissions were abated=area under the MAC curve

TAC=1/2(240x2400)=$288000

b)With no liability clause,the company will emit 240 units of emissions.At this unit of emission,total damages will be equal to the area under the MDC curve

Total Damage Cost from the chemical company=1/2(240x4800)=$576000

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