9. Two firms, A and B, each currently dump 50 tons of untreated toxic chemicals into the local river. The government has decided to reduce the total pollution from 100 tons to 40 tons. From now on each firm will require a pollution permit for each ton of untreated chemicals it dumps into the river. The government will give each firm 20 pollution permits for free. Each firm can sell some or all of its 20 permits to the other firm or buy additional permits from the other firm. It can then dump as many tons of untreated toxic chemicals into the river as the number of permits it has. Any remaining toxic chemicals the firm produces will need to be converted by the firm into a safe and non-polluting form. It costs Firm A $100 to convert one ton of its own toxic chemicals into a safe and non-polluting form, and it costs Firm B $50 to do the same to one ton of its own toxic chemicals. Given that the two firms are allowed to trade pollution permits among themselves, which of the following statements is correct?

a. Firm A will buy 20 permits from Firm B. Consequently, after the trade, Firm A will have 40 permits and Firm B will have 0 permits. As a result, Firm A will dump 40 tons of toxic chemicals into the river and Firm B will dump 0 tons. Firm A will treat (that is, make harmless) its 10 remaining tons at a cost of $1,000 and Firm B will treat its 50 remaining tons at a cost of $2,500. Pollution will be reduced from 100 tons to 40 tons at a cost of $3,500.

b. Firm B will buy 20 permits from Firm A. Consequently, after the trade, Firm B will have 40 permits and Firm A will have 0 permits. As a result, Firm B will dump 40 tons of toxic chemicals into the river and Firm A will dump 0 tons. Firm B will treat its 10 remaining tons at a cost of $500 and Firm A will treat its 50 remaining tons at a cost of $5,000. Pollution will be reduced from 100 tons to 40 tons at a cost of $5,500. c. There will be no trade in permits. Consequently, each firm will have the 20 permits they were given, meaning that each firm will dump 20 tons in the river. Firm A will treat its 30 remaining tons at a cost of $3,000 and Firm B will treat its 30 remaining tons at a cost of $1,500. Pollution will be reduced from 100 tons to 40 tons at a cost of $4,500.

d. Had the government simply ordered each firm to treat (that is, make harmless) 30 of its 50 tons of toxic chemicals, the amount of toxic chemicals dumped into the river could have been brought down from 100 tons to 40 tons at the lowest possible cost to the firms. The tradable pollution permits is a bad idea