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Economics of Pollution Permits

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There are two industrial firms in Beegee. Each currently dumps chemicals into the local river.

Firms Initial Pollution level Cost of reducing pollution by 1 unit
A 75 units $40
B 40 units $10

The government has decided to reduce the pollution to 40 units, so it gives each firm 20 tradable pollution permits.

a. Who sells permits and how many are sold? Why?
b. What is the total cost of pollution reduction in this situation?
c. What would be the costs of pollution reduction be if the permits could not be traded?

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Solution Summary

The solution calculates the total cost of pollution reduction in the given cases.

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a. Firm A has higher cost of reducing pollution. So, it can offer a a maximum price of $40 per permit ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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