The Table below shows the situation facing two firms, both of which are polluting. Assume that each
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The Table below shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
| Firm A | Firm A | Firm A | Firm B | Firm B | Firm B |
| Reduction of Pollution by Firm A | MC of reducing pollution for Firm A | TC of reducing pollution for Firm A | Reduction of Pollution by Firm B | MC of reducing pollution for Firm B | TC of reducing pollution for Firm B |
| 1 | $4 | $4 | 1 | $8 | $8 |
| 2 | 6 | 10 | 2 | 12 | 20 |
| 3 | 9 | 19 | 3 | 16 | 36 |
| 4 | 13 | 32 | 4 | 20 | 56 |
| 5 | 18 | 50 | 5 | 24 | 80 |
- Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are not allowed to trade permits, what is the total cost of the pollution reduction?
- You as an economic consultant tell the government that it should allow trading of the permits. If trading is allowed, how many permits will be traded and how many permits will each firm end up with? Now, what is the total cost of pollution reduction?
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