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 saves money by selling the right to pollute for $30 instead of spending $25 to reduce pollution, and Firm B benefits by buying the right for $30 instead of spending $35 to reduce pollution.

Suppose Two Firms Operate Under a System of Marketable Pollution