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Chapter 14: Environmental Protection
Solutions Manual
Learning Objectives for Chapter 14
After reading this chapter, you should know
LO 14-01. How markets encourage pollution.
LO 14-02. Alternative strategies for reducing pollution.
LO 14-03. Why zero pollution may not be desirable.
Questions for Discussion
1. What are the economic costs of the externalities caused by air toxins (News, p. 304)? Or
beach closings (News, p. 302)? Or thermal pollution (News, p. 306)? How would you
measure their value?
2. Should we try to eliminate all pollution? What economic considerations might favor
permitting some pollution? (LO 14-03)
3. Why would auto manufacturers resist higher fuel efficiency standards? How would their
costs, sales, and profits be affected? (LO 14-01)
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4. Does anyone have an incentive to maintain auto exhaust control devices in good working
order? How can we ensure that they will be maintained? Are there any costs associated with
this policy? (LO 14-01)
5. Should the Indian Point nuclear plant (News, p. 306) be closed? Who will benefit? Who will
lose? (LO 14-03)
6. What economic costs are imposed by mandatory sorting of trash (News, p. 315)? (LO 14-02)
7. “The issuance of a pollution permit is just a license to destroy the environment.” Do you
agree? Explain. (LO 14-02)
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
8. If a high per-bag fee were charged for garbage collection, how would consumers respond?
(LO 14-02)
9. Should EPA’s proposed 2014 carbon-reduction policy (News, p. 318) be adopted? Who
would gain? Who would lose? (LO 14-03)
10. Might the exemption of China from the Kyoto Treaty CO2 limits give it an incentive to
increase CO2 emissions, whose later reduction it could sell (tradable permits)?
Problems
1. (a) If the Indian Point nuclear plant (News, 306) were charged one-tenth of a dollar (0.01
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
cents) for every gallon of water it used, how much would it pay in annual emission fees?
(b) If the cost of building and operating a closed-cycle cooling system was $100 million per
year, would the plant prefer to A = reengineer the plant or B = pay the emission fees?
(LO 14-02)
Answer:
Feedback:
(a) The Indian Point nuclear plant uses 2.5 billion gallons of water a day. Being charged
$0.01 cents per gallon, it would be charged $25 million per day (2.5 billion × $0.01). So the
2. EPA says the value of a human life is $7.6 million, measured from birth to death. If life
expectancy is 78 years, what is the value of the remaining life of a 52-year-old person?
(LO 14-02)
Feedback:
The total value of a person’s life is estimated at $7.6 million. Of the life expectancy is 78
3. How high would its pollution control costs have to be before a firm would “pay to pollute” a
ton of carbon dioxide in Europe (World View, p. 312)? (LO 14-02)
Feedback: Europe has a carbon dioxide market up and running, with release of a ton of gas
now trading at 27 euros, equal to about $32. If a firm’s efforts to bring its pollution level
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4. Most people pay nothing for each extra pound of garbage they create. Yet the garbage
imposes external costs on a community. In view of this factor, what’s an appropriate price for
garbage collection? Answer the questions based on the following graph.
(a) What is the quantity of (free) garbage collection now demanded?
(b) How much would be demanded if a fee of $4 per pound were charged?
(c) Draw the social demand curve when an external benefit of $2 per pound exists.
(d) If the marginal cost of collecting garbage were constant at $6 per pound, what would be
the optimal level of garbage collection? (LO 14-01)
Answers:
Feedback:
(a) Since $0 is collected for garbage collection currently, the quantity of garbage collection
(b) When a $4 fee is charged, the quantity demanded associated with the price of $4 is 12 pounds
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(c) Whenever benefits stretch beyond those who are directly involved, and affect society as a
(d) The optimal rate occurs at the point where the marginal cost of garbage collection equals the
5. Using the high estimate of costs and low estimate of benefits for pollution controls (News, p.
314), what is the average benefit per dollar spent? (LO 14-03)
Feedback:
According to the article, the benefits of major federal regulations were estimated between
6. How much more per ton is New York City paying to recycle rather than just dump its garbage
(News, p. 315)? (LO 14-03)
Feedback:
7. Suppose three firms confront the following costs for pollution control:
Total Costs of Control
Emissions Reduction (Tons per Year) Firm A Firm B Firm C
1 $30 $40 $50
2 70 100 120
3 120 180 210
4 190 280 320
(a) If each firm must reduce emissions by one ton, how much will be spent?
(b) If the firms can trade pollution rights, what would be the cheapest way of attaining a net
three-ton reduction?
(c) How much would a pollution permit trade for (price range)?
Now suppose the goal is to reduce pollution by six tons:
(d)What is the marginal cost of a second abatement ton at
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(i) Firm A?
(ii) Firm B?
(iii) Firm C?
(e) If each firm must reduce emissions by two tons, how much will be spent?
(f) If the firms can trade permits, what is the cheapest way of attaining a six-ton reduction?
(g) How much will a permit cost (price change)? (LO 14-02)
Answers:
(a) $120.
Feedback:
Firm A Firm B Firm C
Quantit
y
Total
Cost
Margina
l Cost
Orde
r
Total
Cost
Marginal
Cost Order
Total
Cost
Margina
l Cost Order
1 $30 $30 1 $40 $40 3 $50 $50 5
(a) If each firm must reduce emissions by one ton, then each firm must simply pay the total
(b) If the firms can trade pollution rights, the cheapest way of attaining a net three-ton
(c) Both Firm A and Firm B have the ability to reduce the third emissions unit at a cost of
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(d) The marginal cost of the second abatement ton is the additional cost associated with the
(e) If each firm must reduce two tons of emissions, the total cost of six tons of emissions
(f) According to the table, the least expensive way to reduce six tons of emission is for Firm
(g) Firm A has the least expensive means of emissions abatement, and under a permit trading
8. The following cost schedule depicts the private and social costs associated with the daily
production of apacum, a highly toxic fertilizer. The sales price of apacum is $22 per ton.
Output (in tons) 0 1 2 3 4 5 6 7 8
Total private cost $5 7 13 23 37 55 77 103 133
Total social cost $45 63 85 111 141 175 213 255 301
Answer the questions using this schedule, and graph on the accompanying figure.
(a) Graph the private and social marginal costs associated with apacum production.
(b) What is the profit-maximizing rate of output for this competitive firm?
(c) How much profit is earned at that output level?
(d) What is the socially optimal rate of output?
(e) How much profit is there at that output level?
(f) How much of a “green tax” per ton would have to be levied to induce the firm to produce
the socially optimal rate of output? (LO 14-01)
Answers:
(a)
Output (in tons) 0 1 2 3 4 5 6 7 8
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(d) Two units.
(e) $31.
(b) The profit-maximizing rate for any competitive firm is the level of output where marginal
(c) Profit is equal to total revenue minus total costs; in this case once again the focus is total
(d) The socially optimal rate of output is 2 units of apacum. This is the output level where
(e) The profit for the firm is equal to total revenue minus total costs. The costs for the firm
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(f) The sales price of apacum is $22. At this price, the socially optimal rate of output is 2
9. What dollar value does EPA put on health care savings from a one-unit reduction in asthma
and heart attacks (News, p. 318)? (LO 14-02)
Feedback:
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
