Refer to the data provided in Table 16.4 below to answer the following questions.
Table 16.4 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.4
\[\begin{array} { | c | c | c | c | c | c | }
\hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \
\hline \begin{array} { c }
\text { Reduction of } \
\text { Pollution by } \
\text { Firm A }
\end{array} & \begin{array} { c }
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c }
\text { TC of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c }
\text { Reduction of } \
\text { Pollution by } \
\text { Firm B }
\end{array} & \begin{array} { c }
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} & \begin{array} { c }
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} \
\hline 1 & \$ 1 & \$ 1 & 1 & \$ 8 & \$ 8 \
\hline 2 & 3 & 4 & 2 & 12 & 20 \
\hline 3 & 6 & 10 & 3 & 16 & 36 \
\hline 4 & 10 & 20 & 4 & 20 & 56 \
\hline 5 & 15 & 35 & 5 & 24 & 80 \
\hline
\end{array}\]
-Refer to Table 16.4. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits, what is the total cost of the pollution reduction?

Question

Refer to the data provided in Table 16.4 below to answer the following questions.
Table 16.4 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.4
 \[\begin{array} { | c | c | c | c | c | c | } 
\hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \
\hline \begin{array} { c } 
\text { Reduction of } \
\text { Pollution by } \
\text { Firm A }
\end{array} & \begin{array} { c } 
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c } 
\text { TC of } \
\text { reducing } \
\text { pollution for } \
\text { Firm A }
\end{array} & \begin{array} { c } 
\text { Reduction of } \
\text { Pollution by } \
\text { Firm B }
\end{array} & \begin{array} { c } 
M C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} & \begin{array} { c } 
T C \text { of } \
\text { reducing } \
\text { pollution for } \
\text { Firm B }
\end{array} \
\hline 1 & \$ 1 & \$ 1 & 1 & \$ 8 & \$ 8 \
\hline 2 & 3 & 4 & 2 & 12 & 20 \
\hline 3 & 6 & 10 & 3 & 16 & 36 \
\hline 4 & 10 & 20 & 4 & 20 & 56 \
\hline 5 & 15 & 35 & 5 & 24 & 80 \
\hline
\end{array}\]
-Refer to Table 16.4. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits, what is the total cost of the pollution reduction?

Quizplus · Accepted Answer

Each firm can emit 2 units of pollution, so they need to purchase 3 permits each (5-2=3). The cost of each permit is $7, so the total cost for each firm is $21 (3 permits x $7 per permit). Therefore, the total cost for both firms to reduce pollution to 4 units is $42 ($21 for each firm).

However, because the firms are allowed to trade permits, they can find the most cost-efficient solution. Firm A can reduce its emissions to 2 units for a cost of $21, and then sell its remaining permit to Firm B for $7. Firm B can then reduce its emissions to 2 units for a total cost of $28 ($21 for permits + $7 to buy from Firm A). The total cost for both firms in this scenario would be $49 ($21 for Firm A + $28 for Firm B). Therefore, trading permits leads to a total cost of $43 ($21 for Firm A + $22 for Firm B) to reduce pollution to 4 units.

Refer to the Data Provided in Table 16 -Refer to Table 16