There are only two firms, X and Y, in an industry that releases sulphur dioxide into the air as a byproduct of the production process. Last year each firm released 60 tons of sulphur dioxide, and the EPA wants to reduce the total by 30 tons. Hence, each firm is given 45 pollution allowances this year. The table below shows how much a firm's cost would increase for each reduction in its SO2 output, For instance, if firm X dumped 5 fewer tons that last year its cost would be $10 higher than if it were allowed to dump the same amount as last year. But if X dimped 10 fewer tons than last year its cost would be $20 higher than if it were allowed to dump the same amount as last year.
The pollution allowances can be traded. Assume that the market for pollution permits has reached equilibrium.
| SO2 reduction |
0 |
5 |
10 |
15 |
20 |
25 |
30 |
| Firm X |
0 |
10 |
20 |
28 |
36 |
42 |
55 |
| Firm Y |
0 |
10 |
12 |
16 |
22 |
30 |
45 |
A. Explain by how much will each firm reduce its SO2 output? Which firm will buy permits, which firm will sell them, and explain how many permits will be exchanged?
B. The total amount of money that is exchanged between the two firms must be more than what number and less than what number?