Question

5. 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

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?

Sol: Cost to Wardco = cost of extracting minerals + cost to treat water

                                 = $40 million + $10 million = $50 million

   Value of mined products to customers = $60 million

Since Value of mined products to customers > Cost to Wardco

    i.e.   $60 million > $50 million

So Wardco should be required to pay the cost of treating water as even after paying the cost of treating water, he gains a profit of $10 million. He will pay the cost.

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?

Sol: Cost to Wardco = cost of extracting minerals + cost to treat water

                                      = $40 million + $10 million = $50 million

Here,   Value of mined products to customers = $48 million

Since Value of mined products to customers < Cost to Wardco

i.e. $48 million <   $50 million

So even if Wardco is required to pay the cost of treating water, he will not do so as by paying the cost he will face a loss of $2 million. The better option for him is to not do mining in Texas region.

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?

Sol: Value of mined products to customers = $48 million

There are two options, in this case

i) If he treats water, Cost to Wardco = cost of extracting minerals + cost to treat water

                                                           = $40 million + $10 million = $50 million

By treating water, Value of mined products to customers < Cost to Wardco

i.e. $48 million <   $50 million

So Wardco will face a loss of $2 million by treating water.

ii) If he buys all the affected residents’ property,

Cost to Wardco = Cost of extracting minerals + Cost of buying residents’ property

                            = $40 million + $ 5 million = $ 45 million

Here, Value of mined products to customers > Cost of Wardco

So Wardco will make a profit of $3 million by buying the property of residents.

So in this case, he should not be required to treat water. Rather the better option is to buy residents property.