Table 9.7
-Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm and that Firm A has sold one permit to Firm B. If Firm B wants to purchase a second permit to be able to discharge 10 tons of sulfur dioxide, what is Firm B's willingness to pay?
A) $2,000
B) $3,000
C) $5,000
D) $9,000

Question

Table 9.7
-Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm and that Firm A has sold one permit to Firm B. If Firm B wants to purchase a second permit to be able to discharge 10 tons of sulfur dioxide, what is Firm B's willingness to pay?
A) $2,000 
B) $3,000 
C) $5,000 
D) $9,000

Quizplus · Accepted Answer

Firm B's willingness to pay for a second permit would be determined by the difference in production costs between discharging 9 tons and 10 tons of sulfur dioxide. If the cost of producing with 9 tons of emissions is significantly lower than with 10 tons, but by purchasing a permit they can emit 10 tons at a lower overall cost, they would be willing to pay up to the difference in those production costs. Without the specific numbers from Table 9.7, we can't calculate the exact amount, but the principle is that Firm B's willingness to pay would be based on the cost savings or the cost avoidance of not having to reduce their emissions to 9 tons.

Table 9.7 -Table 9.7 Shows the Production Cost for Two Utilities at Utilities