Question

The Once-ler produces Thneeds (which everyone needs) in a factory that also produces pollution. The more pollution the Once-ler produces, the lower his production costs, with the marginal benefit of x to the Once-ler equal to MBx = 50–2x, where x is the amount of pollution produced. This pollution harms the local population of Brown Bar-Ba-Loots according to the following marginal cost function: MCx = 20+3x.

The Twoce-ler enters the market for Thneeds and opens a second factory that competes with the Once- ler. The marginal benefit of pollution to the Twoce-ler is MBx = 36–6x.The Lorax’s government changes its regulatory policy and institutes a tradeable emissions permit plan, capping the total amount of pollution at a quantity of 6. It allots 3 of the permits to the Once-ler and 3 to the Twoce-ler.

25. What is the highest price that the Twoce-ler would be willing to pay for a 4th permit? Will this trade occur?

a) 18, No

b) 12, Yes

c) 18, Yes

d) 12, No

e) None of the above

26. What is the lowest price that the Twoce-ler would accept in selling its 3rd permit? Will this trade occur?

a) 18, No

b) 12, Yes

c) 18, Yes

d) 12, No

e) None of the above

27. If the two firms are allowed to trade permits, the Once-ler will end up producing __ units of pollution while the Twoce-ler produces __ units.

a) 2, 4

b) 6, 0

c) 4, 2

d) 3, 3

e) None of the above

Answer 1

25. Option (D) 12, No is correct

This option is correct because maximum price of 4^th permit is

MB_x = 36–6*4

         = 12.

The trade will not occur because the Once-ler want to produce and earn more as compared to Twoce-ler.

26. Option(C) 18, Yes is correct

This option is correct because the Twoce-ler is having the lower return with each subsequent quantity produced. So, he could earn more by entering into a trade.

27. Option(B) 4, 2 is correct

This option is correct because

Once-ler produces:

MB_x=MC_x

50-3x = 20+3x

5x = 30

X= 6.

Twoce-ler produces:

MB_x=MC_x

36-6x = 20+3x

9x = 16

X = 1.78(approx)

Thus, the feasible set from trading would be one where both the producers can produce some level of quantity by less disturbing the society.