Eco200: Practice Test 2 Worksheet With Answer Key - Covering Chapters 10 Through 15 (Page 7 of 7) in pdf

Eco200: Practice Test 2 Worksheet With Answer Key - Covering Chapters 10 Through 15 Page 7

6. Two 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. The government gives each firm 20 pollution permits, which it can

either use or sell to the other firm. 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.

Which firm will buy and which company will sell its permit?

b. After the two firms buy or sell pollution permits from each other, how much will Firm A dump

into the river?

What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from

each other? (Hint: Do not include the cost of obtaining the permit.)

d. 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? (Hint: Do not include the cost of obtaining the permit.)

Solution: Chapter 10, tradable permits…

Firm A will buy all of Firm B's pollution permits with each one costing between $50 and $100.

b. Firm A started with dumping 50 tons of chemicals into the local river, but will buy all 20 permits

from Firms B, which will leave 10 tons of chemicals. Firm A will then pollute 10 fewer tons of

pollution into the river, and Firm B will dump 50 fewer tons of pollution into the river.

Firm A reducing 10 tons at $100 per ton.

10 x $100 = $1,000

Firm B reducing 50 tons at $50 per ton.

50 x $50 = $2,500

$3,500

d. If the government reduced uniformly, then each company will reduce 30 units each

Firm A reducing 30 tons at $100 per ton.

30 x $100 = $3,000

Firm B reducing 30 tons at $50 per ton.

30 x $50 = $1,500

$4,500

Eco200: Practice Test 2 Worksheet With Answer Key - Covering Chapters 10 Through 15 Page 7