An Accra Chemical Factory discharges waste products into a river. These wastes kill many tilapia that are swimming upstream to spawn. While there will no doubt be other ecological damages from the chemical effluent, we wish to focus on those of the fishery. Let E be the tonnes of chemical effluent discharged per month. The equation for Marginal Damages (MD) is MD = 6E. The firm’s Marginal Abatement Cost (MAC) is given by MAC = 800 – 10E. a. Suppose the government invokes a liability law that requires polluters to compensate those damaged in an amount equal to the damages caused. Will the factory change its emission levels in response to the liability laws? Explain. b. If E* is the socially efficient level of emission, prove that reducing effluent to E* is a better strategy for the chemical factory than not reducing waster discharged and staying at E0.
An Accra Chemical Factory discharges waste products into a river. These wastes kill many tilapia
that are swimming upstream to spawn. While there will no doubt be other ecological damages from
the chemical effluent, we wish to focus on those of the fishery.
Let E be the tonnes of chemical effluent discharged per month. The equation for Marginal
Damages (MD) is MD = 6E. The firm’s Marginal Abatement Cost (MAC) is given by
MAC = 800 – 10E.
a. Suppose the government invokes a liability law that requires polluters to compensate those
damaged in an amount equal to the damages caused. Will the factory change its emission levels in
response to the liability laws? Explain.
b. If E* is the socially efficient level of emission, prove that reducing effluent to E* is a better
strategy for the chemical factory than not reducing waster discharged and staying at E0.
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