In an effort to reduce greenhouse gas emissions, the US government passes a bill that requires companies to pay a fine valued at $100,000 for any month in which they exceed the pollution limits set by the EPA. Steve is the CEO of a company which has many production facilities throughout the country. At one of these factories in particular, the current level of pollution generated by the factory is above the EPA’s pollution limit. In order to install cleaner technology that will bring the factory’s pollution level down below the limit, Steve would need to spend roughly $180,000 in renovations. Furthermore, the renovations would take three months to complete, and the factory would need to be shut down during this time (and the factory would not need to pay a fine if it is not operating). Assume that the factory is responsible for making Steve’s company $35,000 in profits every month.
Describe the various options Steve can make in terms of responding to this new bill.
What is the opportunity cost of each option?