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Sub: Economics                                                                    Topic: Micro Economics

Question:

Reducing The Emission Level And Tradable Permits.
Two firms X and Y each dumped 30 tons of sulphur dioxides into the air last year. The EPA wants to
reduce total emissions of SO2 by 12 tons this year. The following table gives the cost to each firm of
reducing its SO2 output by the amount specified. For instance, if X reduced its SO2 output by 1 ton its
cost would increase by 10, and if instead X reduced its SO2 output by 2 tons its cost would increase by
15 (not 10 + 15). (To simplify the calculations, assume that when SO2 output.) Each pollution permit
entitles the holder to dump one ton of SO2. Pollution rights can be traded, and the following
questions ask for some critical values at equilibrium, under two different scenarios.

    1    2     3     4     5     6     7     8      9     10 11 12
X 10 15 20 25 40 50 55 60 65 70 75 80
Y 4      6     8     12 16 20 25 30 38 45 55 70
For each of the following two scenarios answer questions A and B.

A. By how much will each firm reduce its SO2 output? Which firm will buy permits, which firm will
   sell them, and how many permits will be exchanged?

B. The total amount of money that is exchanged between the two firms must be more than what
   number and less than what number?




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 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
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Sub: Economics                                                                   Topic: Micro Economics

Solution:

The efficiency involves equating marginal damage with the marginal savings to the firm from pollution
generation.
The efficiency calls for equating the Marginal Savings from emission from the Marginal Damage.




Using the above information we can find the reduction of emission. The firm X will reduce emission
level up to 5 and the firm Y will reduce its emission level upto 10 when the EPA gives the allowances
of $45 to reduce the emission.




                           www.classof1.com/homework-help/economics
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Economics                                                                        Topic: Micro Economics

      160
      140
      120
      100
       80
       60
       40
       20
         0
               1      2      3        4        5     6      7      8      9      10     11      12

                                     Series1          Series2          Series3




        2)




                                                   ** End of the Solution **




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