Chapter 16, Externalities, Property Rights, and the Coase Theorem

8. Two firms, X and Y, have access to five different production processes, each one of which gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke are listed in the table: (LO7) Process A B C D E (smoke) (4 tons/day) (3 tons/day) (2 tons/day) (1 ton/day) (0 tons/day) Cost to 100 120 140 170 220 firm X Cost to 60 100 150 255 375 firm Y a. If pollution is unregulated, which process will each firm use, and what will be the total daily smoke emissions? b. The city council wants to cut smoke emissions by half. To accomplish this, it requires a municipal permit for each ton of smoke emitted and limits the number of permits to the desired level of emissions. The permits are then auctioned off to the highest bidders. If X and Y are the only polluters, how much will each permit cost? How many permits will X buy? How many will Y buy? c. Compare the total cost to society of this permit auction procedure to the total cost of having each firm reduce emissions by half