Guestion 6) Suppose that two firms emit a certain pollutant. The marginal cost o
ID: 1210525 • Letter: G
Question
Guestion 6) Suppose that two firms emit a certain pollutant. The marginal cost of reducing total pollution for each firm is as follows: MC 1=300 e1 and MC2=100 e2 where e1 and e2 are the amounts of (tons) of emissions reduced by the first and second firms respectively. Assume that in the absence of government intervention, firm1 generates 100 units of emissions and firm2 generates 80 units of emissions. a)suppose regulators decide to reduce total pollution by 40 units.In order to be cost effective,how much should each firm cut its pollution? b) what emissons fee should be imposed to achieve the cost-effective outcome? how much would each firm pay in taxes? c) Suppose that instead of an emissions fee,the regulatory agency introduces a tradable permit system and issues 140 permits,each of which allows the emissions of one ton of pollution. Firm 1 uses its politics to convince the regulatory agency to issues 100 permits to itself and only 40 permits to firm2. How many,if any,permits are traded between two firms?what is the minimum amount of money that must be paid for these permits? By how many tons does each firm end up reducing its pollution?
Explanation / Answer
(a) e1+e2=40 units and mc1=mc2 for the effecient outcome. mc1=300*e1=mc2=100*e2 whihc gives 3*e1=e2. Therefore, e1=10 units ans e2=30units
firm1 should ewduce pollution by 10 units and firm 2 by 30 units
(b)Emission fee should be greater than $300 per unit .Tax collected from each firm is $3000.
(c)firm 1 wants to produce 100 units of emission and the willingness price to sell for firm1 is $300 while the willing price to buy for firm2 is $100, So permits will not sold from firm1 to firm2. But the willingness to sell price for firm2 is $100 so firm1 will buy the permits from firm2. Minimum amout to be paid for a sale of these permits is $100. firm 1 produces 140 units of emission and firm2 produces zero units of pollution. So Firm1 ends up increasing its pollution by 40 units while firm 2 ends up reducing its pollution by 80 units. In total 40 units of emissions is reduced.
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