(1) What is the possible price range for the market price of a pollution permit?

(2) If there is no trading of pollution permits, what is the total cost (the combined costs for both firms) of achieving the total required decrease in pollution?

(3) If trading of pollution permits is allowed, how many pollution permits will be bought and sold?

(4) What is the efficiency gain that is, what is the reduction in the total cost of achieving the total required decrease in pollution from the trading of pollution permits?

(5) Assume that the market price of a pollution permit is set at the midpoint of the possible price range. What is the profit to Firm 1 from being able to trade pollution permits?

2. Consider the following Cap and Trade example. One pollution permit allows the emission of 1 ton of pollution per month. Firm 1 Firm 2 Past pollution emitted 20 tons per month 50 tons per month Required pollution decrease 4 tons per month 10 tons per month Pollution permits received 16 40 Cost of reducing pollution by 1 ton per month $10 $30 2. Consider the following Cap and Trade example. One pollution permit allows the emission of 1 ton of pollution per month. Firm 1 Firm 2 Past pollution emitted 20 tons per month 50 tons per month Required pollution decrease 4 tons per month 10 tons per month Pollution permits received 16 40 Cost of reducing pollution by 1 ton per month $10 $30