24. Firms A, B, C, D, and E each emit 5 units of toxins into the environment per

Question

24. Firms A, B, C, D, and E each emit 5 units of toxins into the environment per year. Their costs of reducing the toxins are given in the following table. FIRM A FIRM B FIRM CF RM D FIRM E COSTS OF ELIMINATING TOXINS 1ST UNIT 100 2NPUNIT 1200 3RD UNIT 400 4TH UNIT 800 5TH UNIT1600 100 300 700 2700 8100 300 500 600 700 1100 800 1000 1200 1500 2000 200 400 600 650 700 The Environmental Protection Agency decides to sell up to 10 Emission Permits. Firms must purchase permits or reduce their pollution. Each permit purchased by the firm allows the firm to emit 1 unit of toxin. The permits cost $750 each. Using the table above what will be the real resource cost to clean up the toxins using the Emissions Permit Method? a. $6350 b. $7400 c. $4650 d. $5200 e. $6450

Explanation / Answer

The Environmental Protection Agency has allowed sell up 10 permits that would allow 10 units of toxin.

We need to therefore identify which 15 of 25 emitted toxin units would be cleaned up. Assuming rational behavior from each of the companies, none of the companies would spend more $750 to clean up one unit of toxin as they can buy a permit to emit by paying same amount to the EPA.

The cleanup therefore by each of the companies would be as shown -

The total real resource cost of clean is therefore,

= 700 + 1100 + 2100 + 0 + 2550

= $6450

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