There are three industrial firms in Happy Valley. Initial Pollution Level Cost o
ID: 2936357 • Letter: T
Question
There are three industrial firms in Happy Valley.
Initial Pollution Level
Cost of Reducing Pollution by 1 Unit
(Units)
(Dollars)
The government wants to reduce pollution to 60 units, so it gives each firm 20 tradable pollution permits.
Because firm (A,B or C)? has the highest cost of reducing pollution by 1 unit, it would like to (sell 20 permits to or buy 20 permits from)? another firm. Because firm (A,B or C)? has the lowest cost of reducing pollution by 1 unit, it is willing to (sell 20 permits to or buy 20 permits from)? the firm with the highest cost.
Complete the second column of the following table by indicating who buys and sells permits in this case. Complete the fourth column of the table with the number of permits each firm ends up with after trading with the others. Next, subtract the number of permits from the initial pollution level to determine how many units of pollution reduction each firm has to complete, and enter these values into the fifth column of the table. Next, determine the total cost of reducing the pollution levels you determined in the previous column, and enter that into the final column of the table. Finally, add up the total pollution reduction costs for each firm and enter the total amount in the final cell of the total row in the following table.
Firm
Buys or Sells
Initial Pollution Level
Permits after Trade
Remaining Pollution Reduction
Cost of Reducing Pollution by 1 Unit
Total Pollution Reduction Cost
(Dollars)
(Dollars)
If permits could not be traded, firm A would have to removeunits of pollution at a total cost of, firm B would have to removeunits of pollution at a total cost of, and firm C would have to removeunits of pollution at a total cost of. The overall cost of reducing pollution in this case is, which is (lower or higher)? than with tradable permits.
Initial Pollution Level
Cost of Reducing Pollution by 1 Unit
(Units)
(Dollars)
A 30 20 B 40 30 C 20 10Explanation / Answer
Because the firm B has the highest cost of reducing pollution by 1 unit, it would like to buy 20 permits from another firm.
Because firm C has the lowest cost of reducing pollution by 1 unit, it will be willing to sell 20 permits from another firm.
If permits could not be traded,
Firm A will have to remove units of pollution at a total cost of 200
Firm B would have to remove units of pollution at a total cost of 600
and Firm C will have to remove units of pollution at a total cost of 0.
The overall cost of reducing pollution in this case(200+600+0=800) is higher than with tradable permits.
Firm Buys or Sells Initial pollution level Permits after trade Remaining Pollution Reduction Cost of Reducing Pollution by 1 Unit Total Pollution Reduction Cost A Neither 30 20 10 20 200 B Buys 40 40 0 30 0 C Sells 20 0 20 10 200 Total 90 60 30 60 400