A new paint factory has opened in Cranbourne creating jobs for local residents however it is built on the edge of a park used for recreational activities. The park also has a lake at its centre which attracts native fauna. Affluent from the factory creates a pungent smell and leaches into the ground affecting both flora and fauna in the park and lake. You are a consultant who has been hired by the City of Casey council to provide advise on dealing with the problem. The following data has been collected by you on the costs and benefits of pollution reduction measures. Table 1 Annual tonnes of emissions: 8, 7, 6, 5, 4, 3, 2, 1, 0 Annual Damage from pollution ($): $700000, $535000, $400000, $310000, $230000, $170000, $115000, $96000, $0 Marginal Benefit of pollution reduction measures ($): ? Annual Cost of pollution reduction measures ($): $0, $37000, $87000, $150000, $230000, $360000, $560000, $765000, $998000 Marginal Cost of pollution reduction measures ($): ? a) Use the data in Table 1 to calculate marginal benefits and marginal costs of pollution reduction measures. b) A council member is suggesting closing the factory down to reduce emissions to 0. Is this the correct course of action? Why or why not? c) What pollution control measures would you recommend (i.e. how many tonnes should be allowed to affect the park and lake?).
Question
A new paint factory has opened in Cranbourne creating jobs for local residents however it is built on the edge of a park used for recreational activities. The park also has a lake at its centre which attracts native fauna. Affluent from the factory creates a pungent smell and leaches into the ground affecting both flora and fauna in the park and lake. You are a consultant who has been hired by the City of Casey council to provide advise on dealing with the problem. The following data has been collected by you on the costs and benefits of pollution reduction measures. Table 1 Annual tonnes of emissions: 8, 7, 6, 5, 4, 3, 2, 1, 0 Annual Damage from pollution (700000, 400000, 230000, 115000, 0 Marginal Benefit of pollution reduction measures (): 37000, 150000, 360000, 765000, ): ? a) Use the data in Table 1 to calculate marginal benefits and marginal costs of pollution reduction measures. b) A council member is suggesting closing the factory down to reduce emissions to 0. Is this the correct course of action? Why or why not? c) What pollution control measures would you recommend (i.e. how many tonnes should be allowed to affect the park and lake?).
Solution
a) The marginal benefit of pollution reduction measures is the change in the damage from pollution as we reduce emissions by one unit. The marginal cost of pollution reduction measures is the change in the cost of these measures as we reduce emissions by one unit.
To calculate these, we subtract the value of the previous year from the current year. For example, the marginal benefit of reducing emissions from 8 to 7 tonnes is 535,000 = 37,000 - 37,000.
We continue this process for all the values in the table.
b) Closing the factory to reduce emissions to 0 may not be the best course of action. While it would eliminate the damage from pollution, it would also incur the highest cost of pollution reduction measures ($998,000). The decision should be based on a comparison of the marginal benefits and marginal costs of pollution reduction. If the marginal cost of reducing pollution is higher than the marginal benefit, then it is not economically efficient to reduce pollution to that level.
c) The optimal level of pollution is where the marginal cost of pollution reduction is equal to the marginal benefit. This is the point where the cost of reducing pollution by one more unit is exactly equal to the benefit gained from that reduction. Looking at the calculated marginal benefits and costs, we can determine the optimal level of emissions. This will be the number of tonnes that should be allowed to affect the park and lake.
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