Refer to the data provided in Table 16.3 below to answer the following question(s).
Table 16.3 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.3
\[\begin{array} { | c | c | c | c | c | c | }
\hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \
\hline \begin{array} { c }
\text { Reduction of } \
\text { Pollution by } \
\text { Firm A }
\end{array} & \begin{array} { c }
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c }
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c }
\text { Reduction of } \
\text { Pollution by } \
\text { Firm B }
\end{array} & \begin{array} { c }
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} & \begin{array} { c }
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} \
\hline 1 & \$ 8 & \$ 8 & 1 & \$ 16 & \$ 16 \
\hline 2 & 12 & 20 & 2 & 24 & 40 \
\hline 3 & 18 & 38 & 3 & 32 & 72 \
\hline 4 & 26 & 64 & 4 & 40 & 112 \
\hline 5 & 36 & 100 & 5 & 48 & 160 \
\hline
\end{array}\]
-Refer to Table 16.3. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits, how many permits will be traded between the two firms?
A) A will buy two permits from B.
B) B will buy two permits from A.
C) A will buy one permit from B.
D) B will buy one permit from A.

Question

Refer to the data provided in Table 16.3 below to answer the following question(s).
Table 16.3 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.3
 \[\begin{array} { | c | c | c | c | c | c | } 
\hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \
\hline \begin{array} { c } 
\text { Reduction of } \
\text { Pollution by } \
\text { Firm A }
\end{array} & \begin{array} { c } 
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c } 
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c } 
\text { Reduction of } \
\text { Pollution by } \
\text { Firm B }
\end{array} & \begin{array} { c } 
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} & \begin{array} { c } 
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} \
\hline 1 & \$ 8 & \$ 8 & 1 & \$ 16 & \$ 16 \
\hline 2 & 12 & 20 & 2 & 24 & 40 \
\hline 3 & 18 & 38 & 3 & 32 & 72 \
\hline 4 & 26 & 64 & 4 & 40 & 112 \
\hline 5 & 36 & 100 & 5 & 48 & 160 \
\hline
\end{array}\]
-Refer to Table 16.3. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits, how many permits will be traded between the two firms?
A) A will buy two permits from B.
B) B will buy two permits from A.
C) A will buy one permit from B.
D) B will buy one permit from A.

Quizplus · Accepted Answer

Firm B has a higher marginal cost (MC) for reducing pollution at every level compared to Firm A. This means it is cheaper for Firm A to reduce pollution than it is for Firm B. Therefore, Firm B, which faces higher costs for reducing pollution, will find it more economical to buy a permit from Firm A, allowing Firm B to pollute more while Firm A reduces its pollution further. Since the government caps emissions at 2 units per firm and wants to reduce total pollution to 4 units, only one permit needs to be traded for both firms to meet the new regulation economically. Firm A will reduce its pollution further (which is cheaper for it to do) and sell one permit to Firm B, who finds it more expensive to reduce pollution.

Refer to the Data Provided in Table 16 -Refer to Table 16