Answer:
Explanation:
E)cost of pollution is reduction in benefit of the firms.
MB=150-5E,. MB=90-3E
E=30-MB/5. E=30-MB/3
Joint MB,
E=60-8MB/15
MB=112.5-1.875E
Total pollution reduction=24
Total pollution=60-24=36
MB=112.5-1.875*36=112.5-67.5=45
Firm 1
MB=150-5E.
45=150-5E.
E=-105/-5=21
Reduction=30-21=9
Firm 2,
MB=90-3E
45=90-3E
E=-45/-3=15
Reduction =30-15=15
So firm 2 is reducing 15 units of pollution and firm 1 reducing 9 units of pollution.
As each firm have to reduce 12 units of pollution but firm 2 reducing 3 units more while firm 1 reducing 3 less units.
So, firm 2 is selling 3 units of pollution emission permit to firm 1.
F)firm 1 reduce 9 units and firm 2 reduce 12 units of pollution after trade.
Total cost of pollution reduction will total Benefit reduction by pollution reduction.
MB=112.5 -1.875E
TB=112.5E-0.9375E^2
TB at E=60
TB=112.5*60-0.9375*60*60=6750-3375=3375
TB at E=36
TB=112.5*36-0.9375*36*36=4050-1215=2836
Total cost of pollution reduction=3375-2836=540
G)price of permit= cost of extra pollution reduction by firm 2 or total cost from 9 to 12 by firm 2
MB=90-3E
TB=90E- 1.5E^2
TB at E=18
TB=90*18 -1.5*18*18=1620-486=1134
TB at E=15
TB=90*15 -1.5*15*15=1350-337.5=1012.5
Permit price=1134-1012.5=121.5
Total cost to firm 2 =1134
Net total cost to firm 2=1134-121.5=1012.5
Total cost to firm 1=150E-2.5E^2=150*9-2.5*9*9=1350-202.5=1147.5
Net total cost=1147.5+121.5=1269
H) the total cost is lower in cap & trade policy is because the firm who has higher cost of pollution reduction is paying the other firm who has lower cost of pollution reduction to reduce more pollution ,so that his part of pollution reduction can be completed.
And the amount he is paying is equal to the amount that is cost of other firm of reducing additional pollution units.
So the cost the firm is lower as he is paying lower amount than if he reduce pollution by itself.
