The following table shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution. $$\begin{array} { | c | c | c | c | }
\hline \text { Firm } & \begin{array} { c }
\text { Total Discharge (in } \
\text { tons) }
\end{array} & \begin{array} { c }
\text { Marginal Cost of } \
\text { Cleanup } \
\text { (per tan) }
\end{array} & \begin{array} { c }
\text { Total Cost of } \
\text { Cleanup }
\end{array} \
\hline \text { A } & 60 & \$ 5.00 & \$ 300 \
\hline \text { B } & 70 & \$ 8.00 & \$ 560 \
\hline \text { C } & 80 & \$ 7.50 & \$ 600 \
\hline \text { D } & 90 & \$ 4.00 & \$ 360 \
\hline
\end{array}$$ The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes and these firms want to maximize profits. If the government wishes to cut discharge by 50 percent, it could do so by establishing an effluent fee of:

Question

The following table shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution. $$\begin{array} { | c | c | c | c | } 
\hline \text { Firm } & \begin{array} { c } 
\text { Total Discharge (in } \
\text { tons) }
\end{array} & \begin{array} { c } 
\text { Marginal Cost of } \
\text { Cleanup } \
\text { (per tan) }
\end{array} & \begin{array} { c } 
\text { Total Cost of } \
\text { Cleanup }
\end{array} \
\hline \text { A } & 60 & \$ 5.00 & \$ 300 \
\hline \text { B } & 70 & \$ 8.00 & \$ 560 \
\hline \text { C } & 80 & \$ 7.50 & \$ 600 \
\hline \text { D } & 90 & \$ 4.00 & \$ 360 \
\hline
\end{array}$$ The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes and these firms want to maximize profits. If the government wishes to cut discharge by 50 percent, it could do so by establishing an effluent fee of:

Quizplus · Accepted Answer

An effluent fee of $5.50 per ton would incentivize firms to reduce pollution up to the point where their marginal cost of cleanup equals the fee. Firms A and D would reduce their pollution since their marginal costs ($5.00 and $4.00 respectively) are less than $5.50, achieving the desired 50% reduction.

The Following Table Shows Four Firms, the Amount Each Pollutes