Problem
Split the Difference for a Pollution Permit. Consider two firms, each of which is issued three marketable pollution permits. For firm H, the marginal cost of abatement is $190. For firm L, the marginal cost of abatement is $130.
a. Is there room for a mutually beneficial exchange of one permit? If so, which firm will buy a permit and which firm will sell a permit?
b. If the two firms split the difference, whats the price of a permit?
c. Suppose that after the exchange of one permit, the marginal cost of abatement for the firm that soldthe permit is $170 and the marginal cost of the firm that bought the permit is $150. Will the firms exchange another permit, or are they done trading?
d. What is the savings in abatement cost from allowing firms to buy and sell a permit?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.