Wo firms, a and b, each currently dump 50 tons 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 ton of pollution dumped into the river. it costs firm a $100 for each ton of pollution that it eliminates before it reaches the river, and it costs firm b $50 for each ton 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 firms are not allowed to buy and sell pollution permits from each other? what is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? a. $3,000; $1,500 b. $4,500; $3,500 c. $4,500; $4,000 d. $4,500; $2,500

Firm A will spend $4,000.

Explanation: Daily chemical dumps into the river firm A & B = 50ton.

i. Firm B clean-up cost before it gets the the river = $50/ton.

= $50 x 50tons = $2500.

ii. Government polution rate $75/ton

= $75 x 40(permits) = $3000

Firm B clean-up is less than the cost of pollution permits with $500. Cleaning up it's pollution would be best since it's the cheaper alternative..

Firm A cleanup cost per ton ($100/ton).

= $100 x 50tons = $5000

ii. Government polution rate $75/ton

= $75 x 40(permits) = $3000.

Firm A clean-up is greater than the cost of pollution permits with $2000. Cleaning up it's pollution would cost more. So purchasing of permits would be best.

iii. Purchasing 40 pollution permits

= $100 x 40

= $4000.

d. Firm A will spend $4,000.

Explanation:

Since Firm B cost of Cleanup before it gets the the river is less than the cost of pollution permits, it will choose to clean up its pollution.

However, since Firm A cleanup cost per ton ($100) is greater than the cost of the pollution permit, it will choose to buy permits.

Maximum Allowable Number of Permits=40

Therefore, Firm A will clean up 10 Tons and dump 40 Tons of Waste.

Cost =(10 Tons *$100)+(40 Tons * $75)

=$(1000+3000)

=$4000.

Firm A will spend $4000.

Firm A will pollute 50 tons of pollution

Firm B will pollute 0 tons of pollution.

Explanation:

As the cost of abatement for firm A is $100 for each ton of pollution. And the cost of abatement for firm B is $50 for each ton of pollution. Whereas the permit cost $75 for each ton of pollution. The government provide 40 permits to each firm.

As if firm A reduce its pollution it cost it $100 and if it buy permit to do pollution it cost it $75. So firm A will not reduce any pollution rather he buys permits from firm B.

Firm B will reduce its pollution because it cost it $50 while to get the permission to pollute that is permit cost it $75. So it cost firm B more if it buy permit and do pollution so it will no longer pollute.

Finally ans -

Firm A will not reduce its pollution as reducing pollution cost it more. And firm B will no longer pollute as doing pollution cost it more.

As the government sell 40 permits to each firm and both firm dump 50 tons of chemical.

So as the firm A has more cost if it reduce pollution rather than using permits so it will buy all the permit available to him by government (i.e.,) 40 permits from government and as it dump 50 tons of chemical so it buys 10 more permit from firm B.

it means firm A will buy 50 permits which cost him 50 * $75 = $3,750. Firm A will spend on the cost of permits.

Firm B will not use permit and reduce its pollution as it cost him lower than buying permits so i costs him $50 * 50 = $2500. So it spend on cost of abatement and not on permits.

S after sales of permits:

Firm A will pollute 50 tons of pollution

Firm B will pollute 0 tons of pollution.