The Effect of Effluent Fees on the Firms' Input Choices
* Firms which have a by-product to production produce an effluent.
* An effluent fee is a per unit fee which firms must pay for effluent that they emit.
* How would producer respond to an effluent fee on the production?
The Scenario: Steel Producer 1) Located on the river: Low cost transportation and emission disposal.
2) EPA imposes a per unit effluent fee to reduce environmentally harmful effluent.
3) How should firm respond to this?
The Cost Minimizing Response to the Effluent Fee
- The factors can be substituted more easily; the more effective the fee is in reducing effluent.
Greater the degree of substitutes, less the firm will have to pay (for example $50,000 with the combination B instead of $100,000 with the combination A).