2. Paper Mill, Oil Refinery and Fishers Trade On the banks of the Great Fish River sit an oil refinery and a paper mill. Both generate a water pollutant called gunk that kills fish, reducing the profits of local fishing boats. But it is costly for the mill and the refinery to clean-up. The Environment Ministry needs to step in with a solution. One way to solve this problem is to break up into three teams of two or three, with one team representing the mill, one the refinery and one the fishing folks.) The tables below show the marginal and total costs to the polluters for clean-up, and also show the marginal and total benefits of clean-up to the fishing community. GUNK PAPER MILL OIL REFINERY FISHERS Emitted Costs of Reduction Costs of Reduction Profit from Reduction (tons/day) Total Marginal Total Marginal Total Marginal $66.7 $40.0 0 0 $197.00 $50.0 $13.3 0 $16.70 $26.70 $196.30 $0.70 $40.0 0 $10.00 $8.00 $5.30 $195.30 $1.00 $33.3 0 $6.70 $5.70 $2.30 $194.20 $1.10 $28.6 0 $4.80 $4.40 $1.30 $192.80 $1.40 $25.0 0 $3.60 $3.60 $0.80 $191.00 $1.80 $22.2 0 $2.80 $3.10 $0.60 $188.80 $2.20 $20.0 0 $2.20 $2.70 $0.40 $186.00 $2.80 $18.2 0 $1.80 $2.40 $0.30 $182.60 $3.40 $16.7 0 $1.50 $2.10 $0.20 $178.30 $4.30 $15.4 10 0 $1.30 $1.90 $0.20 $172.90 $5.40 There is one trick to reading this table. Recognize that the fishers profits are a function of the total pollution in the system (gunk produced by both the mill and the refinery), while the table shows the clean-up costs to each polluter as a function only of their own waste. a. What is the marginal cost to the refinery of cleaning up from 5 to 4? For the mill of cleaning up from 5 to 4? If both the refinery and the mill are at 5, then what is the benefit to the fishers of the refinery cleaning up to 4? b. Suppose that the Ministry puts in place a pollution tax of $3 per ton of gunk. How much pollution will the mill generate? The refinery? c. Suppose instead that the Ministry decides on a cap-and-trade system, limiting total pollution to seven units. And to compensate fishers for damages, the Ministry gives the fishers all seven permits, allowing them to either hold them or sell them. Thus, no