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A coal-powered plant that generates electricity for the western part of North Carolina has been given a quota by the Environmental Protection Agency that limits them to releasing 3 million particles of contaminants per day
A coal-powered plant that generates electricity for the western part of North Carolina has been given a quota by the Environmental Protection Agency that limits them to releasing 3 million particles of contaminants per day. Based on studies of the effect of this type of air pollution on the public, if the release of particles were decreased to 2 million per day, the public would gain $800,000 each year in additional labor income and higher property values. It would increase the operating costs of the plant by $500,000 per year to cut back from 3 to 2 million particles per day.
a. Is this situation resulting in an efficient level of emissions? Why or why not?
b. Suppose a tax of $1 per particle was imposed on the daily average of particle emissions. How does this change the decision to cut emissions back from 3 to 2 million particles per day?
Expert Solution
a. Is this situation resulting in an efficient level of emissions? Why or why not?
Using the rule of costs vs. benefits, the benefit to society is $800,000 and the cost to the plant is $500,000, so the action should be chosen. It may be possible to go further in this direction to the point where the costs and the benefits become equal, which would be an even more efficient choice..
b. Suppose a tax of $1 per particle was imposed on the daily average of particle emissions. How does this change the decision to cut emissions back from 3 to 2 million particles per day?
If the tax is implemented, one million particles would cost the firm one million dollars. Since the benefit to society is not equal to one million dollars but is less at $800,000, this action should not be chosen, because the cost outweighs the benefit.
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