Question

Soot is considered the second largest cause of global warming. It is emitted from a variety of sources, but most notably from vehicles. Damian owns a logistics company that has a very large fleet of diesel trucks. The Australian Government recently introduced legislation that charges companies based on the amount of emissions of their fleets that are above 5% soot. They can either opt to meet the 5% target and pay no permit cost (Process D), or purchase permits entitling them to pollute in excess of 5% (but this will also incur a cost to modify their fleet using Processes A, B, and C).

Process	A	B	C	D
Soot emissions (%)	10	8	6	5
Costs to modify Damian’s fleet with Process ($ thousand)	0	100	700	1200
Permit cost ($ thousand)	1500	1100	300	0

1. A tax would involve levying a charge on all emissions of soot. The goal of this would be to make the marginal private cost of emitting soot more closely reflect the marginal social cost. To maximise efficiency, the value of the tax should ideally be equal to what? . Type MSB for Marginal Social Benefit of emitting soot, MEC for Marginal External Cost of emitting soot, DWL for the Dead Weight Loss of emitting the soot, N for None of these options.
2. Consider the Government altered its goal and instead aimed for soot emission levels of 8%. What would be the total cost to society in the logistics industry if there were a total of 13 firms of the same size as Damian’s who all operated at this 8% level (including Damian)? Answer in millions of dollars (to one decimal place)? $ million.
3. Given the cost of permits provided in the question, and if Damian was free to choose any level of emissions to operate, what process would Damian opt for? . Type A, B, C, or D.

Answer 1

a. The system used by the government is Cap and trade method. Where either a cap or limit of 5% soot emissions is imposed on logistics companies or else an emission permit is sold

b. The table shows different process and cost involved in them.

Process	A	B	C	D
Soot emissions (in %)	10	8	6	5
Costs to modify fleet	0	100	700	900
Permit cost	500	300	100	0

Cost of reducing soot emissions to 5% for 1 firm = $900 thousand

So, the cost of reducing soot emissions to 5% for 7 such identical firms = $6300 thousand or $6.3 million.

c. If the cost of permits was 4 times what is given in table,then the revised costs would be.

Process	A	B	C	D
Soot emissions	10	8	6	5
Costs to modify fleet	0	100	700	900
Permit cost	2000	1200	400	0
Total cost	2000	1300	1100	0

The total cost is lowest in case of process D, so firms would opt process D.