Pollution Regulation

question 10

Essay

Pollution Regulation. Porky Pig, Inc., processes hogs at a large facility in Iowa City, Iowa. Each hog processed yields both pork and a render by-product in a fixed 1:1 ratio. Although the render by-product is unfit for human consumption, some can be sold to a local pet food company for further processing. Relevant annual demand and cost relations are:
Here P is price in dollars, Q is the number of hogs processed (with an average weight of 100 pounds), Q_P and Q_B are pork and rendered by-product per hog, respectively; both total and marginal costs are in dollars. Total costs include a risk-adjusted normal return of 15% on a $2 million investment in plant and equipment.
Currently, the city allows the company to dump excess by-product into its sewage treatment facility at no charge, viewing the service as an attractive means of keeping a valued employer in the area. However, the sewage treatment facility is quickly approaching peak capacity and must be expanded at an expected operating cost of $500,000 per year. This is an impossible burden on an already strained city budget.

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