Firm A: initial pollution level = 120, cost to reduce pollution 1 unit = $75 Firm B:...

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Economics

Firm A: initial pollution level = 120, cost to reducepollution 1 unit = $75
Firm B: initial pollution level = 150, cost to reducepollution 1 unit = $100
a. Assume that the government decides to cut pollution by 1/3,telling firms that â€œStarting next year, you will only be permittedto emit 2/3 as much pollution as you currently do.â€ What is thecost for each firm under this policy?
b. Suppose instead that the government issued permits to eachcompany, entitling them to emit up to 2/3 of their currentpollution output. Firms may buy and sell these permits. What is thepossible range of prices for which both firms would be willing tobuy/sell?
c. Assume that the firms agree to a price in the range you foundin part b. What firm buys permits and which sells? How many permitsare exchanged?
d. What is the total cost of pollution reduction now? Hint: youranswer should make sense when you compare it to part a

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3.8 Ratings (495 Votes)

a Abatement required for firm A1201340 units Cost of abatement for firm ATACa40753000 Abatement required for firm B1501350 units Cost of abatement for firm BTACb501005000 b Cost of permit will be somewhere between See Answer

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