Question

There are three industrial firms in Happy Valley. Firm Initial Pollution Level Cost of Reducing Pollution...

There are three industrial firms in Happy Valley.

Firm

Initial Pollution Level

Cost of Reducing Pollution by 1 Unit

(Units)

(Dollars)

A 70 20
B 80 25
C 50 10

The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.

Because firmB   has the highest cost of reducing pollution by 1 unit, it would like to   another firm. Because firm   has the lowest cost of reducing pollution by 1 unit, it is willing to   the firm with the highest cost.

Complete the second column of the following table by indicating who buys and sells permits in this case. Complete the fourth column of the table with the number of permits each firm ends up with after trading with the others. Next, subtract the number of permits from the initial pollution level to determine how many units of pollution reduction each firm has to complete, and enter these values into the fifth column of the table. Next, determine the total cost of reducing the pollution levels you determined in the previous column, and enter that into the final column of the table. Finally, add up the total pollution reduction costs for each firm and enter the total amount in the final cell of the total row in the following table.

Firm

Buys or Sells

Initial Pollution Level

Permits after Trade

Remaining Pollution Reduction

Cost of Reducing Pollution by 1 Unit

Total Pollution Reduction Cost

(Dollars)

(Dollars)

A    70 20
B    80 25
C    50 10
Total If permits could not be traded, firm A would have to removeunits of pollution at a total cost of, firm B would have to removeunits of pollution at a total cost of, and firm C would have to removeunits of pollution at a total cost of. The overall cost of reducing pollution in this case is

, which is   than with tradable permits.

Homework Answers

Answer #1

Blanks

1) firm B has highest MAC

2) like to buy 40 permits

3) firm C has lowest MAC

4) sell 40 permits

table.

Firm buys/sells initial level Permits after trade remaining reduction cost of reducing   total cost
A neither 70 40 30 20 600
B buys 80 80 0 25 0
C sells 50 0 50 10 500
Total 1100

No trade

1) A will remove 30, total cost = 30*20= 600

2) B will remove 40, TC = 40*25= 1000

3) C will remove 10, TC = 10*10= 100

4) overall cost = 600+1000+100= 1700

5) which is higher than with permits

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