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Suppose a city releases $16$million gallons of raw sewage into a nearby lake. Table $12.8$shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)

	Total Cost (in thousands of dollars)	Total Benefits (in thousands of dollars)
16 million gallons	Current situation	Current situation
12 million gallons	50	800
8 million gallons	150	1300
4 million gallons	500	1650
0 gallons	1200	1900

a. Using the information in Table $12.8$, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs, and Industry Structure if you need a refresher on how to calculate marginal costs.

b. What is the optimal level of sewage for this city?

c. Why not just pass a law that firms can emit zero sewage? After all, the total benefits of zero-emissions exceed the total costs.

Step by step solution

01

Marginal cost : 

It is the expense incurred as a result of using an additional unit of input.

02

(a) Explanation : 

Marginal cost and Marginal benefit are calculated.

03

(b) Explanation : 

The optimal level is one in which the marginal cost equals the marginal benefit (MC=MB). As a result, $4$million gallons of sewage is the optimal amount.

04

(c) Explanation : 

As seen in the chart above, zero sewage levels are not attainable; also, if more than $4$mg is tried, MC>MR occurs, increasing costs; thus, it is preferable to put these resources to more productive use.

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