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Chapter 18: Problem 4

Four firms located at different points on a river dump various quantities of effluent into it. The effluent adversely affects the quality of swimming for homeowners who live downstream. These people can build swimming pools to avoid swimming in the river, and the firms can purchase filters that eliminate harmful chemicals dumped in the river. As a policy adviser for a regional planning organization, how would you compare and contrast the following options for dealing with the harmful effect of the effluent: a. An equal-rate effluent fee on firms located on the river. b. An equal standard per firm on the level of effluent that each can dump. c. A transferable effluent permit system in which the aggregate level of effluent is fixed and all firms receive identical permits.

Short Answer

Expert verified
Each policy option comes with its own strengths and weaknesses. An equal-rate effluent fee is straightforward and incentivizing, but potentially unfair and might encourage illicit disposal. An equal standard per firm controls the total effluent but doesn't necessarily incentivize reduction. A transferable permit system could encourage pollution reduction but its success is dependent on rigorous enforcement; moreover, it could disadvantage smaller firms.

Step by step solution

01

Option A Analysis: Equal-rate effluent fee

An equal-rate effluent fee would mean that each firm pays the same fee for every unit of effluent they dump. This method is straightforward and could incentivize firms to reduce their pollution in order to minimize fees. However, it may be unfair to those firms who naturally produce less effluent. The potential economic burden might also encourage illicit disposal practices.
02

Option B Analysis: Equal standard per firm

An equal standard per firm means each company is allowed to dump the same amount of effluent. This method can be effective in controlling the total amount of effluent but may not necessarily incentivize companies to reduce their pollution, especially if their output is far below the limit. This policy also doesn't account for the disparity in production capacity between firms.
03

Option C Analysis: Transferable effluent permit system

A transferable effluent permit system would involve issuing identical permits to all firms, thereby setting a cap on the amount of effluent each firm can dump. Firms that can reduce their pollution would then have the option to sell their surplus permits to those that can't. This could encourage an overall reduction in pollution. However, the success of this system depends on proper regulation and enforcement. Furthermore, smaller firms might be disadvantaged if larger firms outbid them for additional permits.

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Most popular questions from this chapter

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