Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 3

Branding Iron Products, a specialty steel fabricator, operates a plant in the town of West Star, Texas. The town has grown rapidly because of recent discoveries of oil and gas in the area. Many of the new residents have expressed concern at the amount of pollution (primarily particulate matter in the air and waste water in the town's river) emitted by Branding Iron. Three proposals have been made to remedy the problem:
a. Impose a tax on the amount of particulate matter and the amount of waste water emitted by the firm.
b. Prohibit pollution by the firm.
c. Offer tax incentives to the firm to clean up its production processes. Evaluate each of these alternatives from the perspectives of economic efficiency, equity, and the likely long-term impact on the firm.