Suppose Smith's oil refinery and Jones' paper mill both pollute a river and both firms operate under a system of marketable pollution permits. If it costs Smith $45 to reduce pollution by 500 gallons per day, and Jones can reduce costs by $65 by increasing pollution by 500 units per day

Question

Quizplus · Accepted Answer

Smith can reduce pollution at a cost of $45, while Jones can increase pollution and save $65. By trading the right to pollute for $50, Smith spends less ($45) than he would have to reduce pollution, and Jones pays less ($50) than the amount he saves ($65) by increasing pollution.

Suppose Smith's Oil Refinery and Jones' Paper Mill Both Pollute