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.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.The government gives each firm 20 pollution permits.Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other.What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? You should assume that any firm that buys a permit pays the highest price for that permit.
A)$3,000; $1,500
B)$4,500; $3,500
C)$4,500; $4,000
D)$4,500; $2,500

Question

Quizplus · Accepted Answer

Without trading permits:
- Firm A eliminates 20 tons of pollution at a cost of $100/ton, for a total cost of $2,000
- Firm B eliminates 20 tons of pollution at a cost of $50/ton, for a total cost of $1,000
- Total cost of reducing pollution: $3,000

With trading permits:
- Firm A buys 20 permits from Firm B, paying $50/permit for a total cost of $1,000
- Firm A eliminates 40 tons of pollution (20 through permits, 20 directly) at a total cost of $3,000
- Firm B uses the $1,000 to eliminate 20 tons of pollution at a cost of $50/ton
- Total cost of reducing pollution: $4,000

Therefore, allowing trading permits reduces the total cost of reducing pollution from $3,000 to $4,000. The best choice is allowing trading permits.

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