Question

There are three industrial firms in Happy Valley.

The government wants to reduce pollution to 90 units, so it gives each firm 30 tradable pollution permits. 

Because firm _______  has the highest cost of reducing pollution by 1 unit, it would like to _______  another firm. Because firm _______  has the lowest cost of reducing pollution by 1 unit, it is willing to _______  the firm with the highest cost. 

Complete the second column of the following table by indicating who buys and sells permits in this case. Complete the fourth column of the table with the number of permits each firm ends up with after trading with the others. Next, subtract the number of permits from the initial pollution level to determine how many units of pollution reduction each firm has to complete, and enter these values into the fifth column of the table. Next, determine the total cost of reducing the pollution levels you determined in the previous column, and enter that into the final column of the table. Finally, add up the total pollution reduction costs for each firm and enter the total amount in the final cell of the total row in the following table.

 If permits could not be traded, firm A would have to remove _______  units of pollution at a total cost of _______  firm B would have to remove _______  units of pollution at a total cost of _______ , and firm C would have to remove _______  units of pollution at a total cost of _______ . The overall cost of reducing pollution in this case is _______ , which is _______  than with tradable permits.

Answer 1

Because Firm C has the highest cost of reducing pollution it will buy 30 units from another Firm.

Because Firm A has the lowest cost of reducing pollution it will sell 30 units to the firm with the highest cost.

Firm	Buys or Sells	Initial Pollution Level	Permits after Trade	Remaining Pollution Reduction	Cost of reducing pollution by 1 unit(dollars)	Total Pollution Reduction Cost(dollars)
A	Sell	30	0	(30-0) = 30	5	(30*5) = 150
B	Neither	45	30	(45-30) = 15	10	(15*10) = 150
C	Buy	60	60	(60-60) = 0	20	0
Total						300

If permits could not be traded Firm A would have to remove 0 units pollution at a total cost of 0.

Firm B would remove 15 units of pollution at a total cost of 15*10 = 150

Firm C would remove 30 units of pollution at a total cost of 30*20 = 600

The overall cost of reducing pollution, in this case, is 0+150+600 = 750 which is more than with tradable permits(300).