Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 4

Fidelia and Ameenah are commercial chefs at neighboring restaurants. They both dump waste from their restaurants into the stream running through town. Currently, they are dumping 10 tons of waste apiece, for a total of 20 tons. T he city council passes a law limiting dumping to 14 tons total, or a reduction of 6tons. It costs Fidelia $5 to cut her dumping by 1 ton. It costs Ameenah $3 to cut her dumping by 1 ton.
a. If Ameenah reduces her dumping by 3 tons, and Fidelia reduces her dumping by 3 tons, what will the total cost of cleaning up the 6 tons of dumping be?
b. If Fidelia cleans up 6 tons and Ameenah cleans up nothing, what will the total cost of cleaning up the 6 tons be?
c. If Ameenah cleans up 6 tons and Fidelia cleans up notl1ing, what will the total cost of cleaning up the 6 tons be?
d. Of the options discussed in (a) through (c), which option results in the lowest total cleanup cost for society?
e. Suppose a pollution-reduction system is implemented under which both Ameenah and Fidelia are given 7 pollution permits (for a total of 14 tons, which is what the city council wants). If Ameenah and Fidelia are allowed to buy and sell permits from one another, will Ameenah buy some of Fidelia's permits? Will Fidelia buy some of Ameenah's permits? Or will each simply use up the permits she has been given? Explain your reasoning.