Question

Use following information to answer Q27-Q28 The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103.

	Firm
Unit to be eliminated	A	B	C	D
One Unit	46	45	42	49
Two Units	103	100	98	108
Three Units	180	173	169	188
Four Units	282	263	258	285

Suppose the government wanted to reduce pollution from 16 units to exactly 6 units. Which one of the following fees per unit of pollution would achieve that goal?

A. $55

B. $56

C. $57

D. $59

Answer 1

D. $59

Keep this in mind that to incentivize the firms to reduce pollution, they should have more benefits than it would cost them to reduce pollution.

From 16 to 6, we have to reduce pollution by 10 units, it means 2 from each firm and 1 more from 2 firms.

If we look closely at the cost of reducing pollution for firms B and C are lower than A and D. So it's clear we have to make fine bigger than the cost it would take for these 2 firms to reduce pollution by 3 units.

The cost of reducing 3 units from B is 173 and C is 169.

Now there are 2 methods one is trial and error.

We will see the fine companies would save by reducing pollution.

55 * 3 = 165

56 * 3 = 168

57 * 3 = 171

59* 3 = 177.

Only 177 is higher than 173 and 169 so the fine should be $59.

Another method is dividing the higher of both i.e 173 divide it by 3 is 57.666. So the fine should be higher than $57.66 which is $59.