Question

ABC discovers that one of its buildings is infested with termites. The building is old and has been fully depreciated for tax purposes. The cost of getting rid of the termites is $8,400, none of which is covered by insurance.

Answer 1

A firm facing a pollution tax of $1,000 per 10 pounds of particulates will opt to reduce pollutants by 30 pounds, abating the amount where the marginal cost of abatement is less than or equal to the tax and not beyond that where the cost exceeds the tax.

Step-by-step explanation:

If a firm faces a pollution tax of $1,000 for every 10 pounds of particulates emitted, it will need to make an economic decision based on the cost of abatement versus the tax. The firm will reduce pollutants by the amount where the marginal cost of abatement is equal to or less than the pollution tax.

In this scenario, the firm finds that it is more cost-effective to abate the first three increments of 10 pounds each because the abatement costs ($300 for the first 10 pounds, $500 for the second, and $900 for the third) are less than the corresponding pollution tax. However, for the fourth increment of 10 pounds, the abatement cost is $1,500, which exceeds the tax, thus the firm has no incentive to reduce pollution past this point. Consequently, the firm will choose to abate 30 pounds, where after abatement costs exceed the pollution tax.