If two firms pollute, and the increase in costs to Firm A from decreasing pollution is less than the decrease in costs to Firm B from increasing pollution
A) the firms will not trade the right to pollute.
B) the firms can benefit by trading the right to pollute.
C) while both firms can benefit from trading, there is no way for them to determine an agreeable price.
D) both firms will stop polluting.

Question

Quizplus · Accepted Answer

If the increase in costs to Firm A from decreasing pollution is less than the decrease in costs to Firm B from increasing pollution, the firms can benefit by trading the right to pollute. Firm A can sell its pollution rights to Firm B for a price that is less than the cost of decreasing pollution, and Firm B can then use those rights to pollute more at a cost that is less than the cost of decreasing pollution. This allows both firms to benefit from the trade.

If Two Firms Pollute, and the Increase in Costs to Firm