Question

Question text Two firms, ABC Textile, Inc. and XYZ Coal Mining, Inc., each currently dump 12 tons of chemicals into the local river. The local government has decided that 24 tons of pollution is too much. They want to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm five pollution permits, which it can either use or sell to the other firm. ABC Textile has a resource cost of $45,000 for each ton of pollution that it eliminates and it costs XYZ Coal Mining the amount of $38,000 for each ton of pollution that it eliminates. It is likely that

Select one:

A. Both firms will use their own pollution permits and none will be sold.

B. XYZ Coal Mining will buy all of ABC Textile’s pollution permits. Each one will cost between $38,000 and $45,000.

C. XYZ Coal Mining will buy all of ABC Textile’s pollution permits. Each one will cost less than $38,000.

D. ABC Textile will buy all of XYZ Coal Mining’s pollution permits. Each one will cost less than $38,000.

E. ABC Textile will buy all of XYZ Coal Mining’s pollution permits. Each one will cost between $38,000 and $45,000

Answer 1

ABC Textile, Inc. will buy permits to pollute if the permit cost is under $45,000 per ton. Otherwise it will pay the $45,000 cleanup cost. Also, XYZ Coal Mining, Inc. will buy permits to pollute if the permit cost is under $38,000. However, XYZ Coal Mining, Inc will sell a permit if the price is above $38,000. So, here the ABC Textile will buy all of XYZ Coal Mining’s pollution permits. Each one will cost between $38,000 and $45,000. ABC Textile will buy all 5 of XYZ's permits and XYZ will clean up all of its 12 units of pollution, the price per permit will be above $38,000 each. ABC Textile will then dump 10 tons into the water, and will clean up its remaining 2. The price it pays for a permit will be under $45,000. Hence, the answer is 'E'.