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Thursday, November 30, 2006

Dupont Pollution

The drinking water for thousands of residents in Ohio and West Virginia might become less toxic under an agreement reached between chemical giant DuPont and the Environment Protection Agency. DuPont agreed last week to either treat water contaminated by its West Virginia-based facility or provide alternative drinking water to the public. The drinking water in the area near the plant is contaminated by the chemical perfluorooctanoic acid (PFOA), also called C8, used in the Teflon-manufacturing process. The company is already providing some residents with bottled water under a 2005 agreement reached in a civil lawsuit. Under the new settlement with EPA, Dupont will only need to clean up the water if the level of PFOA is 0.50 parts per billion (ppb) or greater. A previous agreement reached with the EPA in 2002 required DuPont to intervene if PFOA exceeded 150 ppb. According to the EPA, the tougher standards are necessary after studies revealed residents had much higher levels of PFOA in their bloodstreams than the national average. DuPont has steadfastly denied that the chemical is harmful to humans, but the EPA has steadily increased warning about the drugs effects.

In DuPont's case it can be looked at as if it was a monopolist, since it holds a very large market share in the chemical production industry. The EPA is forcing DuPont to internalize the cost of the externality. With the idea that DuPont has plenty of excess profits to pay for cost of the polltuion. DuPont, acting like a monopoly will then artificially restrict the quantity supplied, in order to maximize profits. This will not only cut down the amount of pollution due to less production, but will also protect the society from gross amounts of pollution in their water.

Interesting analysis. I suggest you take another look by considering the model of a monopoly firm. Assume in this model that MSC is greater (or above) the MPC. The efficiency quantity of the product will be where MSC crosses the demand curve. Play around with the diagram just a bit. You should discover that a monopoly polluter might produce the efficiency quantity, or might produce too much output, or might produce too little output.

It turns out that trying to correct one source of market failure alone, when there is more than one source, won't necessarily result in efficiency.
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