Question

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates beforee it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement, each firm will spend how much? How much does each firm pollute after the sale of the permits?

Answer 1

Firm A will pollute 50 tons of pollution

Firm B will pollute 0 tons of pollution.

Step-by-step explanation:

As the cost of abatement for firm A is $100 for each ton of pollution. And the cost of abatement for firm B is $50 for each ton of pollution. Whereas the permit cost $75 for each ton of pollution. The government provide 40 permits to each firm.

As if firm A reduce its pollution it cost it $100 and if it buy permit to do pollution it cost it $75. So firm A will not reduce any pollution rather he buys permits from firm B.

Firm B will reduce its pollution because it cost it $50 while to get the permission to pollute that is permit cost it $75. So it cost firm B more if it buy permit and do pollution so it will no longer pollute.

Finally ans -

Firm A will not reduce its pollution as reducing pollution cost it more. And firm B will no longer pollute as doing pollution cost it more.

As the government sell 40 permits to each firm and both firm dump 50 tons of chemical.

So as the firm A has more cost if it reduce pollution rather than using permits so it will buy all the permit available to him by government (i.e.,) 40 permits from government and as it dump 50 tons of chemical so it buys 10 more permit from firm B.

it means firm A will buy 50 permits which cost him 50 * $75 = $3,750. Firm A will spend on the cost of permits.

Firm B will not use permit and reduce its pollution as it cost him lower than buying permits so i costs him $50 * 50 = $2500. So it spend on cost of abatement and not on permits.

S after sales of permits:

Firm A will pollute 50 tons of pollution

Firm B will pollute 0 tons of pollution.