01 May Question: Soot is considered the second largest cause of global warming. It is emitted from a variety of so…
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’ fleet with Process ($ thousand) | 0 | 100 | 700 | 900 |
| Permit cost ($ thousand) | 500 | 300 | 100 | 0 |
- Given the government’s policy, the government believes that currently emissions of soot are too high. An economist would say that the current level of soot emissions results in less surplus than the optimal level. In other words, the market is currently: Blank 1. Type E for Efficient, NE for Not Efficient, O for exceeding the Opportunity cost or M for Maximising social benefits.
- Imagine the government altered its goal and instead decided that only 60% of Damian’s fleet had to be compliant with the 5% target. What would be the total cost to society be to ensure Damian’s company complied with the Government’s requirements? Answer in millions of dollars (rounded to two decimal places). $Blank 2 million.
- Given the cost of permits and costs to modify his fleet, what process will Damian prefer out of the four options? Blank 3. Type A, B, C, or D.
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