Question

suppose that a food processing plant and a chemical factory are located close to each other on the banks of a river. The chemical factory uses the river to discharge its emissions. The food processing plant (located somewhere downstream) suffers damages from the emissions as it requires clean water for its operations. Assuming MAC = 240-2E and MD = 3E, answer the following questions. Draw this diagram before answering the questions below. You will be asked to upload the diagram at the end of this assignment.

(i) If the chemical factory has the right to use the river ( or has the property right), what amount of emissions is it likely to choose when there is no bargaining yet? _____________

(ii) If the chemical factory has the right to use the river ( or has the property right), what amount of emissions is it likely to choose when they reach a bargaining equilibrium? _______________

(iii) If the chemical factory has the right to use the river ( or has the property right), what is the net gain to the chemical factory in the bargaining equilibrium ( i.e from bargaining compared to the situation where they do not bargain)? Remember net gain/benefit means total benefits - total costs.

(iv) If the chemical factory has the right to use the river ( or has the property right), what is the net gain to the food processing plant in the bargaining equilibrium ( i.e from bargaining compared to the situation where they do not bargain)? Remember net gain/benefit means total benefits - total costs.

#make a diagram as well

Answer 1

(a)

In the absence of regulation, marginal abatement costs will equal zero:

MAC = 0 = 240 - 2E

E = 240/2 = 120

In the absence of regulation, emissions will equal 120 units.

(b)

If a chemical factory has the right to use the river, mutual bargaining can lead to the emission level that can be found by setting

MAC=MD

240-2E=3E

5E=240

E=48

E	MAC=240-2E	MD=3E
0	240	0
24	192	72
48	144	144
72	96	216
96	48	288
120	0	360

(c)

Equilibrium point will occur where marginal damages (MD) are equal to Marginal cost ( MAC)

240--2E = 3E

E = 240/5= 48

Equilibrium number of emissions=48

Equilibrium price =3/2E= 3/2(48)=$72

( As MD =3E,TD= 3/2E²,so, AD = 3/2E)

# NET BENEFITS =total benefits -- total cost

Total Benefit= 240E--E²

Total cost = 3/2E²

NB= 240E--E²--3/2E²= 240E--5/2E²

240(48)--5/2(48)²=$5760

Equilibrium emissions Quantity=48

Equilibrium price = $72

Net Benefit = $5760

(d) Net gain to the food processing unit by bargaining equilibrium = 1/2*48*(240-144) = 2304