Economics A Clean Air Fable First Heard By An Old Well (thanks to Dr. Don Wells, Professor of Economics, University of Arizona) Edmund was a wise old man. He was also asthmatic. Thus, he had a tendency to wheeze. He decided he was breathing too much dirty air and that he should put a new air cleaning system into his house. He talked to doctors, engineers, air system specialists, and others seeking their opinions. He learned that the cleaner the air, the more expensive the equipment he must install. He did some heavy thinking about what it would mean to wheeze less. He learned the degree of comfort he would experience at different levels of clean air. He decided to place values on different amounts of clean air according to these comfort levels. The cost and benefit data are summarized in the following table:

Now Edmund displays his wisdom. He consulted an Economics student! He stated: " I want to cut down on my wheezing. For this I need cleaner air. But how much? Here are the costs and the values I place on the benefits of less wheezing. What percentage of clean air should I aim for?" Answer the following questions from Edmund:

1. What percentage of clean air should I aim for?" (Write an explanation for Edmund which indicates the level of clean air he should aim for, and why.)

70% This is where marginal benefit (20) equals marginal cost (20). Below 70% MB>MC so it makes economic sense to clean more. Above 70% MC>MB so it does not makes economic sense to clean more. Notice that at 70% Net benefit (TB-TC) is also at its greatest.

2. "What does it mean when you tell me that at the 50% level marginal costs equal $13." To go from 40 to 50 percent clean air it will cost an additional/ extra $13. The extra 10% cost $13.

Make a new column to the right of the marginal cost column and title it “Net Benefit (TB - TC)”. Total Benefit - Total Cost = Net Benefit. This means the net benefit at 10% is 5 ( = 5) Solve for net benefit for each of the levels of clean air and then answer the following questions:

TB -TC = Net B

1. At what level (s) of clean air is Net Benefit the greatest? How does this relate to the previous calculations that you made?

3. At what level (s) of clean air is Net Benefit the greatest? How does this relate to the previous calculations that you made? At 60% and 70% net benefit is highest at 255. This is the same percent (70%) that MB = MC.

The marginal/additional costs of reaching 100% outweigh the marginal/additional benefit. Net benefit is lower at 100% than at 70%. 4. "If I were to get 100% clean air, total benefits are $406 and total costs are only $280. Shouldn't I decide on 100% clean air?"

5. What are other examples of this concept of marginal benefit equaling marginal cost (MB = MC)?. 1. Pollution Control in Beijing, China (Olympics) vs. Los Angeles vs. Phoenix. 2. If you find a penny on the ground will you pick it up? What about a dollar? 3. Businesses trying to maximize profits, i.e., if: marginal revenue (MR) = marginal cost (MC). MR = MC is where Total Revenue (TR) – Total Cost (TC), i.e. net profit is greatest.