Question

Two firms, Gene's Gloves and Wally's Wallets, have factories near a lake. Both firms use a chemical for tanning leather. Some of this chemical runs into the lake. Each year Gene's Gloves dumps 15,000 gallons of the chemical and Wally's Wallets dumps 25,000 gallons of the chemical into the lake.

A new study has found that fish and other wildlife are negatively impacted by this chemical. The government has decided to cap the total combined amount of the chemical that the factories can dump into the river at 10,000 gallons/year. For an addition $1/gallon, Wally's Wallets is able to substitute each gallon of harmful chemical for one gallon of a harmless alternative. Gene's Gloves needs to use the harmful but more effective chemical to produce gloves. It costs $3/gallon to safely dispose of the harmful chemical. Assume that Gene's Gloves and Wally's Wallets maintain the same level of production under the new environmental restrictions.

Suppose the government gives each firm the right to dump 5,000 gallons/year. If the firms cannot buy or sell these dumping rights, what is the total cost to both firms for complying with the regulation?

Two firms, Gene's Gloves and Wally's Wallets, have factories near a lake. Both firms use a chemical for tanning leather. Some of this chemical runs into the lake. Each year Gene's Gloves dumps 15,000 gallons of the chemical and Wally's Wallets dumps 25,000 gallons of the chemical into the lake.

A new study has found that fish and other wildlife are negatively impacted by this chemical. The government has decided to cap the total combined amount of the chemical that the factories can dump into the river at 10,000 gallons/year. For an addition $1/gallon, Wally's Wallets is able to substitute each gallon of harmful chemical for one gallon of a harmless alternative. Gene's Gloves needs to use the harmful but more effective chemical to produce gloves. It costs $3/gallon to safely dispose of the harmful chemical. Assume that Gene's Gloves and Wally's Wallets maintain the same level of production under the new environmental restrictions.

Suppose the government gives each firm the right to dump 5,000 gallons/year. If the firms cannot buy or sell these dumping rights, what is the total cost to both firms for complying with the regulation?

Answer 1

At present, Gene's Gloves dumps 15,000 gallons of the chemical in the lake.

If the government gives it right to dump 5,000 gallons per year then Gene's Gloves have to substitute 10,000 gallons with harmless alternative.

Cost of harmless alternative = $3 per gallon

So, Gene's Gloves have to incur a cost of (10,000 * $3) $30,000.

At present, Wally's Wallets dumps 25,000 gallons of the chemical in the lake.

If the government gives it right to dump 5,000 gallons per year then Wally's Wallets have to substitute 20,000 gallons with the harmless alternative.

Cost of harmless alternative = $1 per gallon

So, Wally's Wallets have to incur a cost of ($20,000 * $1) $20,000.

Total cost = $30,000 + $20,000 = $50,000

Thus,

The total cost to both firms for complying with the regulation is $50,000.

The cost of abatement is higher for Gene's Gloves than the Wally's Wallets.

Due to this, Gene's Gloves will prefer to buy pollution rights from Wally's Wallets.

If it buys the pollution rights, it will be able to dump a total of 10,000 gallons of chemical into the lake.

It would be ready to pay anything between $1 and $3 for each gallon of chemical dump into the lake to Wally's Wallets.