The Principality of Copper Pigovia has just one export, pig crackling. The crackling is produced in two plants, Old Gloria and New Gloria. Both plants give off a delightful, mouth-watering odour while in operation. This odour has created a health problem. The citizens' appetites are huge, and, consequently, so are the citizens.
Princess Piglet has decreed that the daily emission of odour from the two plants must be reduced by 7000 Odour Units (OU) per day The Princess prides herself on her even-handedness. The decree specifies that each plant is to reduce its emission by 3500 OU per day.
The following table shows the incremental cost in Upper Pigovian dollars (US) per 1000 OLT of attaining various levels of odour reduction in the two plants. To help in interpreting the table, note that the cost for Old Gloria to remove 3000 OU per day would be 2(U$25) + US30 = US80.
|
Quantity of Odour Removed
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Incremental cost of Removing Odour in SU/1000 OU
|
|
(1000 OU/per day)
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0 to 2
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Over 2
|
Over 4
|
Over 5
|
|
Old
|
25
|
30
|
40
|
50
|
|
New
|
20
|
20
|
25
|
30
|
(a) What is the cost per day of implementing Princess Piglet's decree?
(b) Can you suggest a tax scheme that will yield the same reduction in odour emission as the decree at a lower cost?
(c) Can you suggest a subsidy scheme that will yield the same reduction in odour emission as the decree, but at a lower cost?