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). Both firms benefit from the trade.

Suppose Two Power Plants Pollute a River and Both Firms