The benefits of an oil spill prevention program include avoided costs, fewer disruptions to normal shipping operations, etc. Cleanup time is consuming an expensive. A typical 1000 oil spill might cost $600000 to clean up or $300000 to prevent in the first place. Suppose a 1000 gallon spill closes a commercial fishing area for a time. The objective is to determine the total economic gain from a program that prevents a future spill. The gain in net income to commercial fish harvesters from cleaning up the pollution is added revenue minus added costs.
Added reveune= Pf*H Additional Cost=Cf*H
where Pf=price of fish at $5/pound; Cf=cost of harvesting fish at $4/pound, H is added fish harvested per avoided spill equals 400,000 pounds of fish.
1. Calculate the annual gross benefits and the annual net benefits per oil spill prevented.
2. Suppose an oil spill prevention program increases the supply of the fish enough to decrease the price of fish by 10% with no impacts on the cost of production. Also assume that the cost of cleaning up a 1000 gallon oil spill remains constant at $600,000, and the cost to prevent one is $300,000. The price elasticity for fish in this example is equal to -1.5. Find the gross and net benefits of the prevention program and determine if this program should be continued after the price of fish decreases.