Question

There are two polluting firms in an industry. Each firm is initially generating 200 tons of pollution each year. Each faces the following costs in reducing pollution. Cost of reducing pollution by one ton Firm A $20 Firm B $10 The government has recently set a goal of reducing industrial pollution in the industry by 50% and is considering two policies to achieve this. The first policy would require all firms in the industry to reduce pollution by 50%. The second policy would involve issuing 100 tradable permits to each firm. (With tradable permits, each permit would allow the firm owning it to produce one ton of pollution annually. Firms would be free to buy and sell these permits as they desired. It would be illegal for firms to produce more pollution than the amount of pollution covered by the permits they own.)

Answer 1

Answer:

Permits will be the best option

Explanation:

Assuming the cost per ton of polution reduction follows a linear progression and it can reach zero

The best option will be the permits:

As Firm B will eliminate their polution and sale his permis to Firm A

That occur as Firm B is more efficient in doing this will sale to Firm A

In the end Firm A will have all the permits and continue to produce 200 tons

but Firm B will produce none achieving the goal of 50% reduction with the least economic impact.

This is a market solution which little intervention from the Gvernment

Cost to eliminate 200 polution with permits:

200 x $10 = 2,000

If we force each company to reduce pollution Firm A higher cost will create deadweight-loss

100 x $20 = 2,000

100 x $10 =   1,000

                    3,000