Suppose three firms confront the following costs for pollution control: Total Co

Question

Suppose three firms confront the following costs for pollution control:

Total Costs of Control

Instructions: Enter your responses as a whole number.

(a) If each firm must reduce emissions by one ton, how much will be spent in total by all three firms?

$

(b) If the firms can trade pollution rights, what would be the cheapest way of attaining a net three-ton reduction?

$

(c) How much would a pollution permit trade for (price range)?

Now suppose the goal is to reduce pollution by six tons:

Instructions: Enter your responses as a whole number.

(d) What is the marginal cost of the second ton of emissions reduction at

(i) Firm A?

$

(ii) Firm B?

$

(iii) Firm C?

$

(e) If each firm must reduce emissions by two tons, how much will be spent in total by all three firms?

$

(f) If the firms can trade permits, what is the cheapest way of attaining a six-ton reduction?

$

(g) How much will a permit cost (price range)?

Total Costs of Control

   Emissions Reduction
(tons per year) Firm A Firm B Firm C     1 $40 $50 $60     2 $90 $130 $130     3 $145 $220 $280     4 $280 $340 $500

Explanation / Answer

a) If each firm must reduce emissions by one ton, Total cost = $40 of firm A + $50 of firm B + $60 of firm c = $150.

b) If the firms can trade pollution rights, the cheapest way of attaining a net three-ton reduction = $145.

c) A pollution permit should range between $40 and $50 because cheapest cost is $40 and second cheapest cost is $50.

d) MC of 2nd ton of firm A = $90 - $40 = $50

MC of 2nd ton of firm B = $130 - $50 = $80

MC of 2nd ton of firm C = $130 - $60 = $70

e) If each firm must reduce emissions by two tons, total spent in by all three firms = 90 + 130 + 130 = $350

f) The cheapest way to reduce six tons in total = cost for three tons incurred by firm A + cost of two tons incurred by firm B + cost of one ton by firm C= $145 + $130 + $60 = $335.

g) The permit sould not be less than MC of third ton cost of firm A = $55 and should not be greater than MC of second ton of firm C = 70.

Between $55 and $70.

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