Suppose the United States has two utilities. Commonwealth Utilities and Consolid

Question

Suppose the United States has two utilities. Commonwealth Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year. However, the marginal cost of reducing a ton of pollution for Consolidated Electric is $375 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is S425 per ton The government's goal is to cut sulfur dioxide pollution in half (by 20 million tons per year). If the government issues 10 million tradable pollution permits to each utility, what will be the cost of eliminating half of the pollution to society? Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of $ million per year. If the permits are not tradable, what will be the cost of eliminating half of the pollution? If permits cannot be traded, then the cost of the pollution reduction will he S million per year.

Explanation / Answer

If the government issues 10 million tradeable pollution permits to each utility then the cost of eliminating half of the pollution to society would be 375*20=7500
This is so because commonwealth utility will purchase all the permits from consolidated electric because it has a higher marginal cost of reducing ($425).

Ans is 7500

If permits cannot be traded,then the cost of the pollution will be $ 8500 (375*10 + 475*10)million per year.

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