Two firms, A and B, each currently dump 70 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 30 pollution permits (that's 60 permits in total), which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $200 for each ton of pollution that it eliminates before it reaches the river.

a) If each firm had to use their 30 permits, what would be the total cost to the firms to reduce total pollution from 140 to 60 tons? (2 Marks)

b) If each firm could trade pollution permits, what would be the costs to the firms to reduce total pollution to 60 tons? Is the total cost higher, lower, or the same compared to (a)? (First find a price for the permits) (4 Marks)

c) Smoking can be considered a negative externality while education can be considered a positive externality. What does this mean? Given the above statement, why do we not ban smoking outright, nor provide unlimited free education? (4 marks)