Two firms, A and B, each currently dump 50 tonnes of chemicals into the local ri
ID: 1155106 • Letter: T
Question
Two firms, A and B, each currently dump 50 tonnes of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each tonne of pollution dumped into the river. It costs Firm A $100 for each tonne of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each tonne of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if the firms are NOT allowed to buy and sell pollution permits from each other, and what is the total cost of reducing pollution if the firms ARE allowed to buy and sell permits from each other?
A. $4500; $2500 B. $3000; $1500 C. $4500; $3500 D. $4500; $4000Explanation / Answer
Cost of reducing pollution by 1 tonne for Firm A is $100.
Firm A currently dumps 50 tonnes of chemicals. It get 20 pollution permits from government. So, it have to reduce pollution by 30 tonnes.
Cost of reducing pollution by 30 tonnes = 30 * $100 = $3,000
Cost of reducing pollution by 1 tonne for Firm B is $50.
Firm B is currently dumps 50 toones of chemicals. It get 20 pollution permits from government. So, it have to reduce pollution by 30 tonnes.
Cost of reducing pollution by 30 tonnes = 30 * $50 = $1,500
Total cost = $3,000 + $1,500 = $4,500
Thus,
The total cost of reducing pollution if the firms are not allowed to buy and sell pollution permits from each other is $4,500.
Firm B can reduce each tonne of pollution at $50. So, it will value each pollution permit at $50.
Firm A can reduce each tonne of pollution at $100. So, it will value each pollution permit at $100.
Cost of reducing 1 tonne of pollution by Firm A is double that of the cost of reducing 1 tonne of pollution by Firm B.
So, Firm A will purchase 20 pollution permits from Firm B at $50 each.
After this Firm A has to reduce the pollution by 10 tonnes.
Cost of reducing pollution = 10 * $100 = $1,000
Now, Firm B has to reduce pollution by 50 tonne.
Cost of reducing pollution = 50 * $50 = $2,500
Total cost = $1,000 + $2,500 = $3,500
Thus,
The total cost of reducing pollution if the firms are allowed to buy and sell permits from each other is $3,500.
Hence, the correct answer is the option (C).
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