Question

Irry 2. (Table: Sulfur Dioxide) Industry Sulfur Dioxide Emissions tons) Cesto Reducine 1 Ton of Sulfur Dioxide 100 $100 Industry Y 120 $300 The table sets forth the sulfur dioxide emissions along with the costs of reducing sulfur dioxide emissions for two industries. Suppose the government gives each industry 100 tradable allowances; each allowance allows for 1 ton of sulfur dioxide emissions. Explain how the industries will trade the allowances and the range of prices that the allowances will trade for. What is the final allocation of allowances between the industries? How many tons of sulfur dioxide are removed from the air and at what cost?

Answer 1

2) The cost of reducing each ton of sulphur dioxide is less for industry X and more for industry Y.

Industry X has an eliminating cost of $100 per ton of sulphur dioxide whereas, Industry Y has an eliminating cost of $300 dollars per ton. As each industry is given only 100 tradable allowances. Industry Y will buy 20 units of tradable allowances from industry X because the cost of eliminating pollution by each done for industry Y is $300 and for industry X is $100. The prices at which these allowances will be traded will be between and $100 and $300. By doing so industry X will be left with only 80 tradable allowances, whereas it produces 100 units of pollution. So, industry X will have to eliminate its pollution by 20 tons and the total cost of doing so, would be $100*20 = $2000.

So, we can Conclude that industry Y will buy 20 tradable allowances from industry X and the range of prices at which the allowances will be traded is between $100 and $300. The final allocation of the allowances between industries will be that industry X has 80 units of tradable allowances and industry Y has 120 units of tradable allowances. The total amount of sulphur dioxide is removed from the air is 20 tons and the total cost of doing this is $2000.

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