Suppose two firms operate under a system of marketable pollution permits. If it costs firm A $25 to reduce pollution by 1,000 units per day, and firm B can reduce costs by $35 by increasing pollution by 1,000 units per day:
A)the firms cannot gain by trading the right to pollute.
B)both firms can benefit if firm A trades the right to pollute 1,000 units to firm B for $30.
C)both firms can benefit if firm A trades the right to pollute 1,000 units to firm B for $40.
D)both firms can benefit if firm B trades the right to pollute 1,000 units to firm A for $30.

Question

Quizplus · Accepted Answer

Firm A can reduce pollution at a cost of $25, while firm B can save $35 by increasing pollution. If firm A sells the permit to firm B for $30, firm A gains $5 (since $30 - $25 = $5) and firm B saves $5 (since $35 - $30 = $5), making it beneficial for both.

Suppose Two Firms Operate Under a System of Marketable Pollution