Question

Suppose the United States has two​ utilities, Commonweath 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 ​$275 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is ​$375 per ton. The​ government's goal is to cut sulfur dioxide pollution in half​ (by 20 million tons per​ year).

a. 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?

b. Using a cap-and-tradeLOADING... system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of ​$ nothing million per year.

c. If the permits are not tradable, what will be the cost of eliminating half of the pollution?

d. If permits cannot be traded, then the cost of the pollution reduction

Answer 1

Answer and Explanation:

The computation is shown below:

a. The cost of eliminating is shown below:

= $275 × 20

= $5,500

b. The cost would be $375 per ton

c. In the case when the permits are not tradable so in this the cost is $5,500

d. In the case when the permits cannot be traded so the cost of the pollution reduction is

= $375 × 10 + $275 × 10

= $3,750 + $2,750

= $6,500