Analysis the net benefits of cleanup are maximized, Macroeconomics

Consider the case of cleaning up chemical contamination at an industrial site. The marginal benefits of additional cleanup are decreasing as the amount of cleanup increases. However, the marginal costs of the cleanup are actually decreasing (rather than increasing) in the level of cleanup as well. The reason is that much of the cost of the cleanup involves first locating contamination and then digging to expose contaminated soil. Therefore, the most expensive unit to clean up is the very first. We can depict this graphically.

First, if you were only looking at whether the first small increment of cleanup passed a benefit-cost test, what would you conclude?

Second, does the "equimarginal principle" (MB=MC) lead to a situation where the net benefits of cleanup are maximized?

 

Posted Date: 4/1/2013 4:13:10 AM | Location : United States







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