Question

Exhibit: EPA Regulations There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400 Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to selone unit of pollutant to Company B for $650. Raferante Raf 10-12 (Exhibit: EPA Regulations) Refer to the exhibit. How do both firms profit from trading allowances? Select one: O a. A gains $250, and B saves $350. b. A gains $650, and B saves $1,100, c. A gains $650, and B saves $550. O d. A gains $1,050, and B saves $550.

Answer 1

correct answer is (a.) A gains $250, and B saves $350

• when A reduces pollution by 1 extra unit, it costs him $400 but he sold it to B for amount $650.

so net gain for A is $(650-400)= $250

• when B purchase extra unit of pollution from A, it cost them $650 but they save $1000.

so total saving for B is $(1000-650) = $350.