(solution) 3. Some time ago, a conflict between a paper company and a coalition of envi- ronmental groups…

(solution) 3. Some time ago, a conflict between a paper company and a coalition of envi- ronmental groups…

Some time ago, a conflict between a paper company and a coalition of envi- ronmental groups arose over the potential use of a Maine river for hydro- electric power generation. As one aspect of its case for developing the dam, the paper company argued that without hydroelectric power the energy cost of operating some specific paper machines would be so high that they would have to be shut down. Environmental groups countered that the energy cost was estimated to be too high by the paper company because it was assigning all of the high-cost (oil-fired) power to these particular machines. That was seen as inappropriate because all machines were connected to the same elec- trical grid and therefore drew power from all sources, not merely the high- cost sources. They suggested, therefore, that the appropriate cost to assign to the machines was the much lower average cost. Revenue from these machines was expected to be sufficient to cover this average cost. Who was right?