Help With Economics Externalities Homework ?

1. Travis owns a coal-fired power plant and is thinking about installing a more efficient generator. The generator costs $1 million but would lower Travis’s fuel costs by $5 million. The Environmental Protection Agency requires that $3 million of the fuel savings be passed on to his customers in the form of lower rates.

The EPA also requires power plants that make major upgrades to submit to an EPA review that would require Travis to install expensive pollution control equipment. This doesn’t benefit Travis in any way but the cost of the pollution is $7 million.0.2 million households live downwind of the power plant and are willing to pay $40 each for the lower emissions the pollution control equipment would provide. 0.1 million households live upwind of the power plant and therefore don’t care about pollution. All households use electricity and would split the $3 million of fuel savings equally.a. Calculate the total surplus from upgrading the generator by itself. Is it efficientb. Calculate the total surplus from installing the pollution control equipment by itself. Is it efficient to install the pollution control equipment?c. What is the allocation that results under the EPA’s pollution control equipment mandate (conditional on the upgrade). Will the EPA’s rule result in an efficient allocation? If not, what would be a better allocation?e. What might be an alternative regulation which results in the efficient allocation and would benefit everyone?

1 Answer

  • 3 weeks ago

    Travis will lose out, tell him not to do it

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