Suppose there are only two firms that pollute, A and B, and each emits 10 tons of waste into the air. Firm A can reduce its pollution at a cost of $100 per ton, and Firm B can reduce its pollution at a cost of $500 per ton. Each has been given an emission credit that allows it to pollute 6 tons. If firms maximize profits, what will happen?
A) Each firm will clean up 4 tons and pollute 6 tons.
B) Firm B will buy four credits from A; B will emit 10 tons, and A 2 tons.
C) Firm A will buy four credits from B; A will emit 10 tons, and B 2 tons.
D) Firm B will buy one credit from A; it will cut pollution to 7 tons, and firm A will cut it to 5 tons.

Question

Quizplus · Accepted Answer

Firm B will buy credits from A because it is cheaper for B to buy credits than to reduce its own pollution. Firm A will sell credits because it can reduce pollution at a lower cost.

Suppose There Are Only Two Firms That Pollute, a and B