There are three industrial firms in Happy Valley.

The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.
a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation?
b. How much higher would the costs of pollution reduction be if the permits could not betraded?

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Initial Cost of Reducing Firm Pollution Leve Pollution by 1 Unit 70 units 80 units 50 units $20 $25 $10