The Effect of Effluent Fees on the Firms' Input Choices

*  Firms which have a by-product to production produce an effluent.

*  An effluent fee is a per unit fee which firms must pay for effluent that they emit.

*  How would producer respond to an effluent fee on the production?

The Scenario: Steel Producer

1) Located on the river: Low cost transportation and emission disposal.

2) EPA imposes a per unit effluent fee to reduce environmentally harmful effluent.

3) How should firm respond to this?

The Cost Minimizing Response to the Effluent Fee

*  Observations:

- The factors can be substituted more easily; the more effective the fee is in reducing effluent.

Greater the degree of substitutes, less the firm will have to pay (for example $50,000 with the combination B instead of $100,000 with the combination A).