Part II: Businesses' Private and Social Responsibilities
In recent years, businesses have been forced to take a closer look at the environmental impacts caused by their production process. For example, what are the environmental consequences resulting from the process of using inputs and producing output (e.g. ranging from transporting large amounts of raw materials and bringing them into the factory to the creation of waste products and pollution)? Complying with government environmental legislation requires businesses to be increasingly responsible for the pollution they cause. However, many firms were quick to comply with environmental regulations, not initially to ensure compliance with legislation, but to declare their environmental awareness and proclaim a responsible environmental image. As they may gain benefits from being seen as socially and environmentally responsible, consumers may prefer their products, insurance companies may be happier to cover them, and government agencies may be willing to work with them on certain projects. On the other hand, stakeholders may take action against those businesses they perceive to be contravening standards.
Now, suppose that the costs and benefits of a firm operating under perfect competition are given in the table below. As shown, its activities create a certain amount of pollution. Assume that the costs of this pollution to society, which the firm incurs, can be accurately measured.
\begin{tabular}{|l|l|l|l|l|}
\hline \begin{tabular}{l}
Output \\
(units)
\end{tabular} & \begin{tabular}{l}
Price per unit \\
(\$)
\end{tabular} & \begin{tabular}{l}
Marginal (Private) \\
Costs (\$)
\end{tabular} & \begin{tabular}{l}
Marginal External Costs \\
(pollution) (\$)
\end{tabular} & \begin{tabular}{l}
Marginal (Social) \\
Costs (\$)
\end{tabular} \\
\hline 1 & 100 & 30 & 20 & 50 \\
\hline 2 & & 30 & 22 & 52 \\
\hline 3 & 35 & 25 & 60 \\
\hline 4 & & 45 & 30 & 75 \\
\hline 5 & 60 & 40 & 100 \\
\hline 6 & 78 & 55 & 177 \\
\hline 7 & & 100 & 77 & 240 \\
\hline 8 & & 130 & 110 & 130 \\
\hline
\end{tabular}
Questions
3. What are the profit-maximising and socially-efficient levels of output for this firm? Is complying with environmental laws consistent with the objective of profit maximisation?
4. Why might the marginal pollution costs increase in the way this example illustrates? You may graph suitable diagrams, using the values given in the table, to support your answer.
