1. Suppose there are two firms that each emit 20 units of pollution, and the State Pollution Board wants to reducethis level to a total of 20 units between both firms. It will allocate 10 permits to each firm, and each permit willallow 1 unit of pollution per permit.Let R1 denote the pollution units abated (reduced) by firm 1 and R, denotes the pollution units abated by firm 2.The firms have the following marginal costs of pollution reduction:MCR;=2R;MCR;=4R2.And the following total costs of pollution reductionTCR; = R;? (equal to the quantity of pollution reduction, squared)TCR2 = 2R,?Note that since current pollution is 40 units, the policy will require R1 + R = 20.a. If each firm keeps its 10 permits, how much will they each spend in total to reduce emissions? (Hint: you cangraph the MCR curves to find the areas for total cost. See figure 8.5 in textbook.)b. What is the cost-effective solution for the target of 20 units of total pollution abatement?c. If the firms trade (buy/sell) pollution permits and reach the cost-effective method of pollution reduction,which firm will be the buyer of permits, which firm will be the seller, and how many permits will be traded?

a. Total cost of abatement or the total cost to be spent in total for reducing emissions that can be…

1. Suppose there are two firms that each emit 20 units of pollution, and the State Pollution Board wants to reduce this level to a total of 20 units between both firms. It will allocate 10 permits to each firm, and each permit will allow 1 unit of pollution per permit. Let Rị denote the pollution units abated (reduced) by firm 1 and R2 denotes the pollution units abated by firm 2. The firms have the following marginal costs of pollution reduction: MCR;=2R; MCR;=4R3. And the following total costs of pollution reduction TCR; = R;? (equal to the quantity of pollution reduction, squared) TCR; = 2R;? Note that since current pollution is 40 units, the policy will require R; + R2 = 20. a. Ifeach firm keeps its 10 permits, how much will they each spend in total to reduce emissions? (Hint: you can graph the MCR curves to find the areas for total cost. See figure 8.5 in textbook.) b. What is the cost-effective solution for the target of 20 units of total pollution abatement? c. If the firms trade (buy/sell) pollution permits and reach the cost-effective method of pollution reduction, which firm will be the buyer of permits, which firm will be the seller, and how many permits will be traded?

1. Suppose there are two firms that each emit 20 units of pollution, and the State Pollution Board wants to reduce this level to a total of 20 units between both firms. It will allocate 10 permits to each firm, and each permit will allow 1 unit of pollution per permit. Let Rị denote the pollution units abated (reduced) by firm 1 and R2 denotes the pollution units abated by firm 2. The firms have the following marginal costs of pollution reduction: MCR;=2R; MCR;=4R3. And the following total costs of pollution reduction TCR; = R;? (equal to the quantity of pollution reduction, squared) TCR; = 2R;? Note that since current pollution is 40 units, the policy will require R; + R2 = 20. a. Ifeach firm keeps its 10 permits, how much will they each spend in total to reduce emissions? (Hint: you can graph the MCR curves to find the areas for total cost. See figure 8.5 in textbook.) b. What is the cost-effective solution for the target of 20 units of total pollution abatement? c. If the firms trade (buy/sell) pollution permits and reach the cost-effective method of pollution reduction, which firm will be the buyer of permits, which firm will be the seller, and how many permits will be traded?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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