There are many chemical plants that produce kitchen and bathroom cleaners. Throu
ID: 1207847 • Letter: T
Question
There are many chemical plants that produce kitchen and bathroom cleaners. Through the production process, the plants release toxins into the ocean, polluting the water and killing marine life nearby. Suppose the government wants to reduce pollution and is therefore considering selling pollution permits that allow a company to pollute 1 ton per day for each permit it holds. The graph below depicts the market demand for pollution permits Price (Dollars per permitl 200 160 140 120 80 60 40 20 Demand 50 100 150200250 QUANTITY (Permits] If the government issues a total of 150 permits, the market price of a permit will beExplanation / Answer
In this problem there are two chemical plants A and B. They are producing Kitchen and Bathroom cleaner. They generate a toxin which pollutes the ocean water. Therefore government wants to control such pollution. Government has decided to sell permits to pollute water. Any firm can produce their products after buying required numbers of pollution permit. One permit will allow the firm to pollute 1 ton per day.
The demand curve of permit is available. It shows the relation between price and quantity of pollution permit. If price is lowered then more permits can be sold in the market. Here government has decided to sell 150 units. So as per demand curve price of $40 can be charged per permit.
Answer: If government issues 150 permits, the market price of permit will be $40
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Next there are merginal benefit curve of two firm. It shows how much extra benefit a firm will get from last unit of permit. They will buy permits so long marginal benefit of last permit exceeds price. Equilibrium purchase is arrived at when marginal benefit and price are equal. At $40 price, benefit curve of A shows that 40 tons of toxin is required. So firm will buy 40 permits.
For second firm B marginal benefit at $40 price is 20 tons. So 20 permits will be bought.
Answer: Plant A will choose to purchase 40 permits while plant B will choose to purchase 20 permits.
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As the marginal benefit curve of A is steeper than B, Plant A will not reduce much pollution due to such permit. But plant B will generate less pollution than A. It is because cost of toxin emmissio is low for firm B. So it will reduce more toxin emmission and will buy less permit than A. So Plant B is reducing toxic emmission more than plant A. So the statement is true.
Answer: Statement is true.
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