Suppose two power plants pollute a river and both firms operate under a system of marketable pollution permits. If it costs firm A $90 to reduce pollution by 800 units per day, and firm B can reduce costs by $115 by increasing pollution by 800 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 increase pollution by 800 units to firm B for $70.
C)both firms can benefit if Firm B trades the right to increase pollution by 800 units to firm A for $120.
D)both firms can benefit if Firm A trades the right to increase pollution by 800 units to firm B for $100.

Question

Quizplus · Accepted Answer

Firm A can reduce pollution at a cost of $90, while firm B can save $115 by increasing pollution. If firm A sells the right to pollute to firm B for $100, firm A gains $10 (since $100 - $90 = $10) and firm B saves $15 (since $115 - $100 = $15), resulting in a net benefit for both firms.

Suppose Two Power Plants Pollute a River and Both Firms