Question

9. Problems and Applications 99 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 firmililli has the highest cost of reducing pollution by 1 unit, it would like to another firm. Because firm v the firm with the highest cost. has the lowest cost of reducing pollution by 1 unit, it is willing to

There are three industrial firms in Happy Valley.

Answer 1

In the given problem, the initial pollution level and cost of reducing pollution by 1 unit for three firms are given in table Suppose govemment would plan to reduce pollution by 75 units and it allows 25 pollution tradable permits to each firm Because firm A has the highest cost of reducing pollution by 1 unit, it would like to purchase 25 permits from another firm. Because firm B has lowest cost of reducing pollution by 1 unit, it is willing to sell 25 permits to the firm with the highest cost The table is shown below Remaining pollution reduction Firm Buys Initial Permits Cost of Total or sells pollution level after trade reducing pollution pollution reduction by 1 unit cost A Buys 50 50 40 o[-40x0] 25+2550-50] B Sells 0 25 20 500 25-25 25-0] [25x20] X C Neither 25 15 450 [40-25 15x30 buy nor sell Total 950 If permits could not be traded, firm A would have to remove 25 50-25] units of 0 [ 25-25] units of $1,000 25*401, firm B have to remove pollution at a total cost at a total cost of S0 0*20], and firm C would have to remove 15 [40- of pollution 25] units of pollution at a total cost of S450 [-15*30] |S1,450| [= $1,000$450], which is The overall cost of reducing pollution in this case is greater than with tradable permits 30 25 40