There are 3 firms in Bell-land that emit the pollution levels given in the table below when producing their good. The table also shows how much it would cost each firm to reduce the level by one unit.
|
Firm
|
Pollution level
|
Cost to reduce 1 unit of pollution
|
|
A
|
70 units
|
$20
|
|
B
|
80 units
|
$25
|
|
C
|
50 units
|
$10
|
The government wants to reduce pollution to 120 units. So it gives 40 pollution permits (tradable allowances) to each firm. One permit is needed for each unit of pollution dumped.
1. What firm sells their permits and how many do they sell?
2. What firm(s) buys the permits and how many do they buy?
3. Briefly explain why the sellers and buyers are each willing to do sell or buy?
4. What is the total cost of reducing pollution using this method
5. If trading of permits wasn't allowed what would be the cost of reducing pollution to 120 units?
6. Which policy is more efficient? Which policy do you think the government should do and why?