Refer to the data provided in Table 16.4 below to answer the following question(s).
Table 16.4 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.4
\[\begin{array} { | c | c | c | c | c | c | }
\hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \
\hline \begin{array} { c }
\text { Reduction of } \
\text { Pollution by } \
\text { Firm A }
\end{array} & \begin{array} { c }
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c }
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c }
\text { Reduction of } \
\text { Pollution by } \
\text { Firm B }
\end{array} & \begin{array} { c }
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} & \begin{array} { c }
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} \
\hline 1 & \$ 2 & \$ 2 & 1 & \$ 16 & \$ 16 \
\hline 2 & 6 & 8 & 2 & 24 & 40 \
\hline 3 & 12 & 20 & 3 & 32 & 72 \
\hline 4 & 20 & 40 & 4 & 40 & 112 \
\hline 5 & 30 & 70 & 5 & 48 & 160 \
\hline
\end{array}\]
-Refer to Table 16.4. 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 16.4 below to answer the following question(s).
Table 16.4 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.4
 \[\begin{array} { | c | c | c | c | c | c | } 
\hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \
\hline \begin{array} { c } 
\text { Reduction of } \
\text { Pollution by } \
\text { Firm A }
\end{array} & \begin{array} { c } 
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c } 
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c } 
\text { Reduction of } \
\text { Pollution by } \
\text { Firm B }
\end{array} & \begin{array} { c } 
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} & \begin{array} { c } 
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} \
\hline 1 & \$ 2 & \$ 2 & 1 & \$ 16 & \$ 16 \
\hline 2 & 6 & 8 & 2 & 24 & 40 \
\hline 3 & 12 & 20 & 3 & 32 & 72 \
\hline 4 & 20 & 40 & 4 & 40 & 112 \
\hline 5 & 30 & 70 & 5 & 48 & 160 \
\hline
\end{array}\]
-Refer to Table 16.4. 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) of 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, facing higher costs for reducing pollution, will find it more economical to buy pollution permits from Firm A, rather than reducing its own emissions. Since the government wants to reduce the total pollution to 4 units, and each firm is initially capped at 2 units, Firm B will seek to buy permits from Firm A to avoid the higher costs of reducing its own emissions. Firm A, with lower costs of reduction, will reduce its pollution and sell its permits to Firm B.

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