Firm A and Firm B emit 300 tonnes of pollution each and each have marketable permits that allow each to emit 100 tonnes of pollution. If it costs $5,000 for Firm A to eliminate 100 tonnes of pollution and it costs Firm B $6,000 to eliminate 100 tonnes of pollution, then
A) Firm A sells its permits to Firm B for a price above $6,000.
B) Firm A sells its permits to Firm B for a price below $6,000.
C) Firm B sells its permits to Firm A for a price below $6,000.
D) Firm B sells its permits to Firm A for a price above $6,000.
E) neither Firm A nor Firm B sells permits because neither has extra permits.

Question

Quizplus · Accepted Answer

Firm A has a lower cost of eliminating pollution ($5,000) compared to Firm B ($6,000). Therefore, it is more cost-effective for Firm A to reduce its emissions and sell its permits to Firm B. The price will be below $6,000, making it economically beneficial for Firm B to buy the permits instead of reducing its own emissions at a higher cost.

Firm a and Firm B Emit 300 Tonnes of Pollution