Question

The Government of Malaca has decided to sell pollution permits that will allow people to discharge pollutants into its largest freshwater lake Each permit represents the right to discharge one tonne of pollutants. Malaca has determined that the lake will tolerate a maximum of 21 tonnes of pollutants per year and has decided to sell the permits using a Dutch auction. This means that the auction starts at a very high price, which is reduced in steps until the price reaches a level that will result in all 21 tonnes of pollution permits being sold at the same price. The results of the bidding are shown in table below. sidder A Bidder B Bidder C Bidder D Bidder Price per Pollution Permit 5700 6.500 5.400 4,200 3,100 2300 1,700 1.ee see 2 2 3 4 1 2 2 1 2 2 2 3 3 4 4 1 2 3 3 4 4 5 2 2 3 3 4. 5 3 5 5 6 S 6 6 a. What will be the price of pollution permits as a result of this auction? Price: $ b. Suppose that Bidder E happened to be an environmental protection group. If this group had not participated in the auction, what would the price of pollution permits have been, and what difference would there have been in the amount of pollutants discharged into the lake?

Answer 1

The price of pollution permits will be determined by the bid level where the total demand reaches 21 tonnes. Without Bidder E, the price would likely be higher due to reduced competition, but the total pollution would remain the same, capped by the number of permits. The marketable permit system ensures cost-effective pollution reduction.

Step-by-step explanation:

The final price of pollution permits in the Dutch auction described will be the price at which all 21 tonnes can be sold. Since Bidder A demands 2 permits at $1,700 and above, Bidder B demands 3 at $1,700 and above, Bidder C demands 4 at $1,700 and above, and Bidder D demands 5 at $1,700 and above, adding these up (2+3+4+5) we get a total of 14 permits demanded at the price of $1,700. The auction price would need to be lowered further to ensure all 21 tonnes of permits are sold. Assuming this trend continues, we would determine the final price when the quantities demanded by all bidders sum up to 21 tonnes.

If Bidder E, presumed to be an environmental protection group, did not participate in the auction, the price would probably be higher since there would be less competition for the permits. However, without knowing the quantities Bidder E demanded at various price levels, we cannot pinpoint the exact price. The amount of pollutants discharged into the lake would remain the same, which is capped at 21 tonnes by the number of permits.

The system of marketable permits ensures that firms that find it least expensive to reduce pollution will do so, and the total quantity of pollution will decline. This means the market is efficient as it allows the reduction of pollution at the lowest cost to society.