Two firms, A and B, each currently dump 50 tons of chemicals into the local rive

Question

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 permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. 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 beforee it reaches the river. Neither firm produces any less output, but they both conform to the law.

It is likely that between the cost of permits and the cost of additional pollution abatement, each firm will spend how much?

How much does each firm pollute after the sale of the permits?

Explanation / Answer

For Firm A it is beneficial to buy the permits and not reduce pollution, while For firm B it is beneficial to reducing pollution rather than buying permits.

Explaination : it is so because Firm A costs more if it reduce pollution i.e., $100 per ton and cost $75 if he get the permit.

Firm B cost more if it buy permit to continue the pollution as it cost it $75 which is greter than the cost of abatement (i.e,, $50).

Each of them dump 50 tons of chemicals meand 50 tons of pollution and there are only 40 permits available to each by government.

So firm A will buy all 40 permits from government and as firm B does not require any permit because it will reduce its pollution rather than buying permits so Firm A will buy 10 units of permit from Firm B ( in order to continue dumping 50 tons of chemcial ) as 40 units of permit is available to FIrm B, but B donot use it.

So Firm A will spend $75 * 50 = $3750 on permits and spend $0 on additional pollution abatement.

Firm B will spend $0 on permits and $50 * 50 = $2500 on additional pollution abatement.

After the sale of permits.

- Firm A will continue polluting 50 tons of pollution whereas Firm B will pollute 0 units of pollution.

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