Question

In Mark A. Cohen, “The Costs and Benefits of Oil Spill Prevention and Enforcement,” Journal of Environmental Economics and Management Vol. 13 (June 1986), an attempt was made to quantify the marginal benefits and marginal costs of U.S. Coast Guard enforcement activity in the area of oil spill prevention. His analysis suggests (p. 185) that the marginal per-gallon benefit from the current level of enforcement activity is $7.50, while the marginal per-gallon cost is $5.50. Assuming these numbers are correct, would you recommend that the coast Guard increase, decrease, or hold at the current level of their enforcement activity? Why?

Answer 1

Marginal benefit is $7.50.

Marginal cost is $5.50.

Marginal benefit is larger than the marginal cost, which shows net benefit for the society.

The efficient level occurs when marginal benefit and marginal cost both are equal.

Marginal benefit decreases as there is increase in production.

And, marginal cost increases as there is a increase in production.

So, there should be increase in production such that marginal benefit decrease and marginal cost increase till both get equal to each other.

So, it is recommended that the coast guard increase the level of their enforcement activity.