Two firms,A and B,each currently dump 50 tons of chemicals into the local river.The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river.The government gives each firm 20 pollution permits,which it can either use or sell to the other firm.It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river,and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river.It is likely that
A)Firm A will buy all of Firm B's pollution permits.Each one will cost between $50 and $100.
B)Firm B will buy all of Firm A's pollution permits.Each one will cost between $50 and $100.
C)Both firms will use their own pollution permits.
D)Firm A will buy some of Firm B's pollution permits.Each one will cost less than $50.

Question

Quizplus · Accepted Answer

Firm A has a higher cost of eliminating pollution compared to Firm B. Therefore, it is more cost-effective for Firm A to buy Firm B's pollution permits rather than eliminating the pollution themselves. Firm B, on the other hand, has a lower cost of eliminating pollution, so it is more cost-effective for them to use their own permits. Therefore, Firm A will likely buy all of Firm B's pollution permits, and each one will cost between $50 and $100.

Two Firms,A and B,each Currently Dump 50 Tons of Chemicals