Draw the marginal benefit curve for nutrient cleanup, Microeconomics

You are tasked with evaluating a project for reducing nutrient (nitrogen and phosphorus) loading into the Gulf of Mexico (GOM). These nutrients make their way into the GOM by way of the Mississippi River and primarily come from the runoff of chemical fertilizer and animal manure from Midwestern farms. They can trigger hypoxia (look it up) in the marine ecosystem, leading to "dead zones", unattractive and toxic algae blooms, and fish kills. A consultant for the National Oceanic and Atmospheric Administration (NOAA) estimates the following "marginal benefit" curve to fishermen and other affected communities for reductions in nutrient loads from their baseline (2010) levels: MB = 10-.1Q. Q is in units of millions of tons of nitrogen removed (so 1=1,000,000 tons). MB is in millions of dollars per million tons (so 1 = $1,000,000).

a. Draw the marginal benefit curve for nutrient cleanup given the equation above. Explain why the downward slope of this curve is reasonable (hint: what does this imply for the extra damage done by each extra unit of pollution as it is released into the ecosystem?). Finally, explain why this is a "demand curve" for pollution abatement.

b. Graphically, show how the total benefits of nitrogen removal can be calculated from the marginal benefit function at a reduction of 10 million tons (Q=10). Calculate these total benefits numerically.

c. Using the logic developed in the previous question, come up with an equation that gives you total benefits. In other words, come up with an equation of the total area of the "rectangle" and "triangle" that make up total benefits for any level of Q. (Note that I showed how to do this in class for a specific example. You should also be able to check your work by seeing if your equation can replicate your answer for part b.) Graph this equation (by hand or feel free to cut and paste from Excel or a similar graphic program).

d. Intuitively, explain why total benefits increase at a decreasing rate as the level of pollution abatement increases.

Posted Date: 4/1/2013 4:11:11 AM | Location : United States

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