3. (4 points) Suppose there are two firms producing 6 units of pollution each. T

Question

3. (4 points) Suppose there are two firms producing 6 units of pollution each. The govem decides that they want to reduce the total pollution to 6 units, so they issue 3 pollution permits to each firm. The cost of abating the pollution for each firm are given in the following table: FIRM A Unit of pollution FIRM B Unit of pollution Marginal Cost of cleaning up this unit of pollution S6 $14 $25 $40 S60 $90 Marginal Cost of cleaning up this unit of pollution $35 $70 $120 $180 $280 $390 If the two firms work together to reduce the total cost of cleaning up the pollution, how many permits will be traded and which firm will sell the permits and which firm will buy the permits?

Explanation / Answer

Market will trade upto a point till where the marginal cost of abatemwnt of last unit of pollution is same.

Thus firm B will take 5permit in total and will buy 2 permit from firm A

Thus total cost for 6 abatement =6+14+25+40+60+35=180

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.