Question

1. Wardco mining would like to expand operations in a west Texas region affecting a single small town. Expansion would put toxic chemicals into the groundwater that, if untreated, would make the water undrinkable. This is the only effect and, even then, the chemicals breakdown in about a decade.

a. If it cost Wardco $40 million to extract the minerals but would cost $10million to treat the water and the value of mined products to customers is $60million, should Wardco be required to pay the cost of treating the water?

b. If it cost Wardco $40 million to extract the minerals but would cost $10million to treat the water and the value of mined products to customers is $48million, should Wardco be required to pay the cost of treating the water? Would Wardco do so?

c. Suppose it cost Wardco $40 million to extract the minerals and the value of mined products to customers is $48million. It would cost $10million to treat the water but only $5million to buy all the affected residents’ property. Should Wardco be required to treat the water in this case?

Answer 1

1)a) Cost of mining is $40 million and cost of water treatment is $10 million.

The revenue generated is $60 million.

So if Wardco decides to treat the water, the total cost would be $50 million , which is still less than revenue. Hence it should treat the waste water.

b) Now the revenue has changed to $48 million which is less than the cost of $50 million, when the water treatment is included.

So though Wardco should pay for the water treatment because it is responsible, but it won't pay in this case , because there would be losses if the $10 million are paid.

c) Wardco would buy the property worth $5 million rather than clean the water because cleaning is more expensive.

So it would buy the property and the total cost would be $40+5=$45 million while the value of minerals mined is $48 million. So Wardco would be at profit in this case. Hence it will not treat water rather buy the land.

( You can comment for doubts)