Question

A fishery and a C.C. are both operating on the river. MarginalAbatementCost = 90 – E and MarginalDamage = 30 + 2E , where Emissions is measured in tonnes.

1) The fishery owns the river. The C.C. offers the fishery the minimum lump-sum payment to allow them to emit Ese (emissions social efficiency). The fishery suggests the maximum payment. The C.C. has better lawyers and negotiators so they eventually agree to a 60/40 split of the gains (the C.C. gets the 60% share). What is the dollar value of the payment? a)1360 b)1320 c)1280 d)1240

Answer 1

Ans: None of the above

Explanation:

The equilibrium condition is:

Marginal Damage = Marginal Cost

30 + 2E = 90 - E

3E = 60

E = 60 / 3

   = 20

Profit = Total Damage

Profit = E (30 + 2E)

         = 30E + 2E²

         = (30 * 20) + (2 * 20²)

         = 600 + 800

         = 1400

Amount paid to fishery = 0.40 * 1400 = 560

Therefore, the dollar value of the payment made to the fishery is 560.

So, answer is none of the above.