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Homework answers / question archive / A beekeeper decides to locate her business on a plot of land that is between an apple orchard and an elementary school
A beekeeper decides to locate her business on a plot of land that is between an apple orchard and an elementary school. Describe a possible negative externality and a possible positive externality that may result.
Three firms make rubber duckies for playtime in the bathtub: the firms are called Huey, Dewey, and Louie. The first row of the table that follows shows the current level of chemicals emitted into the air by their production processes. The following rows show how much it would cost each firm to reduce pollution by additional increments of 100 pounds. First, calculate the cost if each firm is required to reduce its own emissions by one-third. Then, imagine that each firm is issued marketable permits equal to its current level of emissions, but the quantity that one can emit with those permits will shrink by one-third. With a system of tradable permits, what is the cost of reducing emissions by one-third?
| Huey | Dewey | Louie | |
|---|---|---|---|
| Current emissions of chemicals in pounds | 600 | 900 | 1200 |
| Cost of reducing emissions by 100 pounds | $20 | $7 | $25 |
| Cost of reducing emissions by a second 100 pounds | $25 | $14 | $32 |
| Cost of reducing emissions by a third 100 pounds | $30 | $21 | $40 |
| Cost of reducing emissions by a fourth 100 pounds | $35 | $28 | $48 |
| Cost of reducing emissions by a fifth 100 pounds | $40 | $36 | $60 |
The beekeeper whose business is located on a plot of land that is between an apple orchard and an elementary school will create externalities.
A possible negative externality would be that the bees sting the children at the school and a possible positive externality would be that bees help in pollinating the orchard leading to more fruit.
The cost to each firm to reduce its own emissions by one-third is:
Huey
The current emission = 600 pounds
If they reduce their emission by one third:
= 1/3 * 600
= 200 pounds.
Therefore, cost incurred by the firm to reduce its own emissions by one-third is
= Cost of reducing the emission by 100 pounds + Cost of reducing the emission by a second 100 pounds
= $20 + $25
= $45
Dewey
The current emission = 900 pounds
If they reduce their emission by one third:
= 1/3 * 900
= 300 pounds.
Therefore, cost incurred by the firm to reduce its own emissions by one-third is
= Cost of reducing the emission by 100 pounds + Cost of reducing the emission by a second 100 pounds + Cost of reducing the emission by a third 100 pounds
= $7+ $14 + $21
= $42
Louie
The current emission = 1200 pounds
If they reduce their emission by one third:
= 1/3 * 1200
= 400 pounds.
Therefore, cost incurred by the firm to reduce its own emissions by one-third is
= Cost of reducing the emission by 100 pounds + Cost of reducing the emission by a second 100 pounds + Cost of reducing the emission by a third 100 pounds + Cost of reducing the emission by a fourth 100 pounds
= $25+ $32 + $40 + $48
= $145
Total emissions post 1/3rd reduction in emission for
Huey = 600- 200
= 400 pounds.
Dewey= 900 - 300
= 600 pounds.
and for
Louie = 1200 - 400
= 800 pounds.
If each firm is issued marketable permits equal to its current level of emissions then the quantity that one can emit with those permits will shrink by one-third which is equal to 200 for Huey, 300 for Dewey and 400 for Louie.
Since the marketable permits equal to their current emissions, the marketable permit is 600 for Huey, 900 for Dewey and 1200 for Louie. Tradable permits are permits which firms can buy and sell amongst themselves which gives them the right to pollute a given quantity. It depends on the willingness of the firms to buy and sell these permits. If the firm produces less pollution than the authorized level, then it can sell its permits to other firms or factories. But if the pollution is more than the authorized level, then it can buy permits from other firms or factories. Each firm will try to buy at a price which is definitely less than the cost it incurs to reduce the pollution by itself. However, here firms cannot trade their respective permits because no standard permit limit is given to each of them and each firm has different costs.
Therefore their the marketable permit equals their current emission which is 600, 900 and 1200 respectively and the quantity that they can emit with those permits will shrink by one-third which is equal to 200 for Huey, 300 for Dewey and 400 for Louie.
The cost of reducing emissions by one-third is $42, $45 and $145 respectively.
Therefore the total cost of reducing emissions by one-third is $42 + $45 + $145 = $232
