Econ MC

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 20 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $50 for each ton of
pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will dump

a. 10 fewer tons of pollution into the river and Firm B will dump 50 fewer tons of pollution into the river.

b. 50 fewer tons of pollution into the river and Firm B will dump 10 fewer tons of pollution into the river.

c. 30 fewer tons of pollution into the river and Firm B will dump 30 fewer
tons of pollution into the river.

d. 10 more tons of pollution into the river and Firm B will dump 50 fewer tons of pollution into the river.

Think the problem through, then take a shot.

i am so confused and don't know where to start.

Lets take what is given, make a few simple assumption. First, assume production doesnt change.

Firms A and B will each continue produce 50 tons of chemicals -- 100 total. Under the allowed program, each firm can dump the chemicals up to the number of permits it has, received or purchased. In must spend $ to clean up the rest. Since a total of 40 permits are handed out, 60 tons total must be cleaned up; there will be 60 tons less pollution. (So eliminate answer d).

Now then, the trade between the firms. Firm A will buy permits to pollute if the permit cost is under $100 per ton. Otherwise it will pay the $100 cleanup cost. Similarly, firm B will buy permits to pollute if the permit cost is under $50. However, firm B will sell a permit if the price is over $50. In other words for firm B, it can use one permit and reduce pollution by 1 ton. Or it could sell the permit for, say $75, but pay the $50 to clean up the unit of pollution, and the one permit sale will make firm B $25 better off.

Well, firm B will SELL ALL of its allotted 20 permits, and clean up all of its 50 units of pollution. The price per permit will be above $50 each. Firm A will BUY ALL 20 of B's permits. It will then dump 40 tons into the water, and will clean up its remaining 10. The price it pays for a permit will be under $100.

Go with a)

i get it now, thanks so much.

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