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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
All options have their pros and cons depending on the scenario. Equal-rate effluent fee may deter firms from polluting however doesn't account for firms' individual circumstances. Equal standard per firm may be unfair for companies that are inherently more polluting and doesn't consider different impact points. Transferable effluent permit system minimizes overall cost but may cause uneven distribution of pollution.

Step by step solution

01

Evaluate Equal-Rate Effluent Fee

Under the equal-rate effluent fee, all firms would be required to pay the same fee for the pollution they cause to the river. This would encourage the firms to reduce their pollution, since more pollution would lead to higher fees. However, this policy does not take into account the varying capabilities of different firms to reduce pollution or the varying impacts of pollution at different points in the river.
02

Evaluate Equal Standard Per Firm

An equal standard per firm would require each firm to limit their pollution to a certain level. This policy could be effective if all firms had similar capacities to reduce pollution. However, this policy may be unfair if some firms are inherently more polluting than others. This policy would also not take into account the varying impacts of pollution at different points in the river.
03

Evaluate Transferable Effluent Permit System

A transferable effluent permit system would cap the total amount of pollution allowed, and distribute permits equally among the firms. Firms that can reduce pollution cheaply would be incentivized to do so, selling their unused permits to firms for which reducing pollution is more expensive. This system would achieve the desired level of pollution, and do so in a way that minimizes the overall cost to the firms. However, it may lead to certain areas of the river being more polluted than others.

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