Two firms, A and B, each currently dump 50 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 will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

Firm A will spend $4,000.

Explanation:

The chemical dumped into the river daily by

Firm A = 50 ton

Firm B = 50 ton

ATQ,

The clean-up cost of Firm B before getting into the river = $50 per ton.

= $50 x 50tons = $2500.

2). Pollution rate as per government = $75 per ton

No. of permits = 40

= $75 x 40

= $3000

As we know,

The clean-up cost of Firm B is lesser than the cost of pollution permits with $500($3000 - $2500). Cleaning up the pollution would be best because it is a cheaper alternative..

The  cleanup cost of Firm A per ton = $100 per ton.

= $100 x 50tons

= $5000

2). Pollution rate as per the govt. = $75 per ton

= $75 x 40 permits

= $3000.

The clean-up cost of Firm A is greater than the cost of pollution permits with $2000. Thus, the cleaning up the pollution would cost more for Firm A. Thus, they must go for purchasing the permits.

3). Purchasing 40 pollution permits  would cost

= $100 x 40

= $4000.

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