Question 1 Report
A coastal hotel pumps wastewater into the sea at night. The hotel avoids paying for treatment, while nearby shellfish farmers report lower output and higher cleaning costs.
(a) What is the external cost in this situation? [1]
(b) Explain why the hotel's profit may be higher when it does not treat the wastewater. [1]
(c) State one regulation that could make the hotel take account of the external cost. [1]
(d) Analyse one possible disadvantage of this regulation. [1]
(a) The external cost is the cost imposed by wastewater pollution on shellfish farmers, such as lower output and higher cleaning costs, and on the marine environment. [1]
(b) The hotel's profit may be higher because it avoids the private cost of treating its wastewater. [1]
(c) The government could impose a legal discharge limit. [1] Compulsory wastewater treatment or a pollution permit would also be acceptable.
(d) Monitoring compliance with a discharge limit may be costly. [1] Alternatively, firms may evade the rule, or compliance could raise hotel costs and prices.
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