Two firms, Cappcore and Tradiola, are each emitting 6 units of pollution, and th

Question

Two firms, Cappcore and Tradiola, are each emitting 6 units of pollution, and the government wants to reduce the total level of pollution from the curent level of 12 to 4. To do this, the government caps each firm's allowed pollution level at 2. Each firm must now pay to cut pollution levels by 4 units. A cap-and-trade policy gives each firms allows them to trade permits if they choose. Based on the table below which represents the situation faced y these two firms, what will the firms want to do?

Cappcore

pollution reduction units MC of reducing pollution TC of reducing pollution

1 $7 $7

2 10 17

3 14 31

4 19 50

5 26 76

6 35 111

Tradiola

pollution reduction units MC of reducing pollution TC of reducing pollution

1 $3 $3

2 4 7

3 6 13

4 9 22

5 14 36

6 21 57

Explanation / Answer

Reducing the pollution output is comparetively costly for Cappcore. SO it is evident that, out of a required reduction of 8 units ( of which 4 fall under their quota ), they will try to avoid reducing their output to 2 units. Instead they will use cap and trade policy.

Assume both first reduce 4 units.

Cappcore TC = 50

Tradiola TC = 22

MC of tradiola for 5th unit reduction = 14

MC of cappcore for 4th unit reduction = 19

So Out of the 19 that cappcore used for its reduction in 4th unit of pollution it can give 14 to tradiola which will feel no problem in reducing its pollution output by 5 units. ( the extra cost being beared by someone else, in this case cappcore) . At the same time cappcore can save 5.

Using similar calculation you can find that this saving is not possible for any value ( = 2 or 1 ) of pollution reduction by cappcore.

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