Assume that two firms A and B are currently emitting 100 units of a pollutant each. Now assume that a standard is set, permitting them to emit only 50 units of pollutant each. If either firm emits less than 50 units, it will be given a credit for the difference. The credit can then be sold to other firm, allowing it to go over the 50 unit limit by the amount of the credit. Assume that the marginal cost of pollution reduction for firm A is 2000 per unit and for firm B is 1000 per unit, irrespective of the current level of emission.

(i) How many units of pollution will each firm emit after trade in credits between the two firms has taken place? Illustrate your calculations. [3 marks]

(ii) What can we say about the price at which the credit will be traded? Explain how you arrive at your answer. [3 marks]

(iii) What are the major components of cost and benefits that must be taken into account while deciding on whether to construct a new public hospital or not near any of these firms? [ (b) How is the level of unemployment measured and what are the difficulties that are likely to arise while measuring unemployment?