For instance, Environment Canada's current regulated limit for grease & oil effluent in the clean water coming out of municipal wastewater treatment plants is 15 mg/litre of water. Environment Canada is evaluating pre-treatment to remove more oils & greases at source from industrial wastewater generated by larger firms located in Canadian cities. Policy analysts have estimated that for residents of a municipality with a water treatment plant, the marginal social benefit of such additional water pollution abatement is SMB = 0.90 - 0.03A, where abatement activity A is measured in mg of grease & oil pollutants removed from litre of wastewater released into the municipal sewer system. Analysts estimate that about 2000 firms located in Canadian cities release the majority of such pollution. Industry experts have estimated that for the typical Canadian firm the marginal cost of such pretreatment abatement activity for each litre of water is MC = 0.30 + 0.09A. Marginal costs and benefits are in of dollars per litre of wastewater pre-treated. Use correct units in your answers.

a. What is the optimal level of pre-treatment abatement activity by Canadian firms?

b. Explain what happens when new technology reduces the marginal cost of abatement to MC = 0.25 + 0.06A.

c. What effluent fee would the government of Canada have to charge to get firms to voluntarily perform the level of abatement in a.?

d. Is an effluent fee better than using lowering the regulated amount of effluent allowed to come out of the municipal water treatment plants?

e. Municipal taxpayers pay the costs of municipal wastewater treatment. The customers of the firms required to pre-treat their wastewater would be paying the extra cost of this pretreatment. Is this fair?