04 Jun Question Buchanan Industries receives total benefit/profit from polluti
Question
Buchanan Industries receives total benefit/profit from polluting according to the formula:
10Q Q2where Q = pollution emitted (in tons), and profits are measured in dollars. The total costs/damages associated with pollution from this facility are estimated to be: D Q2 2Q
(a) Draw a graph of both the marginal benefits and marginal damages from pollution curves, labeling all axes, intercepts, and slopes.
(b) If Buchanan Industries could ignore the damages it caused…- How much Q would it produce?
– How much profit would it earn at this level of production?- How much would its total damages be?- What would be the net benefits (i.e., difference between profits and damages)?
(c) What is the efficient level of Q for this firm? How much profit would Buchanan Industries earn at this level of production? How much would total damages be? What would be the net benefits?
(d) What is the deadweight loss associated with Buchanan Industries ignoring the damages that its production causes? Show the deadweight loss on your diagram.
(e) Those who live near Buchanan Industries propose that it produce no more than Q = 1. What is the deadweight loss associated with this level of production? Show this DWL on your graph.
(f) Who benefits from reducing Q from the initial level in (b) to the efficient level in (c)? Who bears the costs? Is this change Pareto improving or could it be a potential Pareto improvement (say after transfer/compensation)?
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