Question 4 (1 point) Two chemical producers are releasing mercury-containing eff

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Question 4 (1 point) Two chemical producers are releasing mercury-containing effluent into the ground water system. Each source releases 200 units of effluent, for a total of 400 units. Dollar values are in millions. The two firms' total abatement cost functions are TAG = 10A1 + 0.25a? If the government develops a cap-and-trade policy and allocates 155 permits to each polluter originally (Firm 1 has 155 permits and Firm 2 has 155 permits), which of the following is correct? Note: One permit will allow firm to release one unit of the effluent. TAC2 -25A2 0.25A22 1) Firm 1 will sell 10 permits to Firm 2. 2) Firm 2 will sell 15 permits to Firm 1. 3) None of the other answers are correct. 4) Firm 1 will sell 15 permits to Firm 2. 5) Firm 2 will sell 10 permits to Firm 1. Save

Explanation / Answer

Note that MAC1 = MAC2 is required after trade of permits

10 + 0.5A1 = 25 + 0.5A2

0.5(A1 - A2) = 15

A1 = A2 + 30

Firm 1's abatement is 30 units more than firm 2's abatement. If they trade 15 units, both will have same MAC. Firm 2 will sell 15 units to Firm 1 so that Firm 1 can now release 170 units

Correct option is option 2.

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