9. Problems and Applications 09 There are three industrial firms in Happy Valley

Question

9. Problems and Applications 09 There are three industrial firms in Happy Valley. Initial Pollution Level (Units) 50 25 40 Cost of Reducing Pollution by 1 Unit (Dollars) 40 20 30 Firm The government wants to reduce pollution to 75 units, so it gives each firm 25 tradable pollution permits. Because firm has the highest cost of reducing pollution by 1 unit, it would like to another firm. Because firm has the lowest cost of reducing pollution by 1 unit, it is willing to 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

Explanation / Answer

Because firm A has the highest cost of reducing pollution it would like to buy tradable permit from another firm. Because firm B has lowest cost of reducing pollution it would like to sell tradable permit to the firm with highest cost

A Buys total 25 permits from B which sells permit as it has lowest cost so A has after trading total 50 Permits and total reduction required by A will be 0 and 0 cost B will have 0 permit and total reduction required by B will be 25 and cost will be 25*20=500 for C it will neither buy nor tsell and will have total 25 permits it has recieved initially and total reduction required will be 15 and cost will be 15*30=450

If no permit was traded total cost for reduction will be A has to reduce 25 and cost=25*40=1000, B have to reduce 0 with 0 cost as it is producing its quota of 25 C will have to reduce 15 and cost =15*30=450 which givs overall cost at 1450 which is higher then was with tradable permit

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