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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

There are three industrial firms in Happy Valley.

Firm Initial Pollution Level Cost of Reducing Pollution by 1 Unit
A 70 units $20
B 80 units $25
C 50 units $10

 The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.

  1. 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?
  2. b. How much higher would the costs of pollution reduction be if the permits could not be traded?

9.    There are three industrial firms in Happy Valley.

Firm Initial Pollution Level Cost of Reducing Pollution by 1 Unit
A 30 units $20
B 40 units $30
C 20 units $10

 The government wants to reduce pollution to 60 units, so it gives each firm 20 tradable pollution permits.

  1. 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?
  2. b. How much higher would the costs of pollution reduction be if the permits could not be traded?

Subpart (a):

To determine
Total cost.

Explanation

From the three firms, Firm ‘B’ is the highly polluted (80 units) firm and its cost of reducing pollution by 1 unit is $25 (Greater reduction cost than other two firm). Firm ‘A’ is medium polluting (70 units) firm and the cost of reducing pollution by one unit is $20. Firm ‘C’ is polluting 40 units and the cost of reducing one unit of pollution is $10.

The government wants to reduce pollution to 120 units and it gives each firm, 40 units tradable pollution permits.

Since Firm B’s pollution level exceeds 40 units, it would be ready to buy 40 units permit from the other firms. On the other hand, Firm A’s pollution level is also greater than 40 units. Thus, Firm ‘A’is also ready to buy 30 units.

Since Firm B’s reduction cost per unit is greater than all the other firms, it would offer a higher price to buy pollution permit from Firm ‘C’. Since the offer price for Firm ‘B’ would be greater than Firm ‘A’, Firm‘A’ would not compete with Firm ‘B’. Thus, Firm ‘B’ buys 20 units of pollution permits from Firm C.

Thus, Firm ‘B’ needs not reduce any pollution level. Firm ‘A, and Firm ‘C’ has to reduce pollution level to 30 units (7040) , and 50 units respectively. Thus, the total cost to reduce the pollution can be calculated as follows:

Total cost=((Pollution reduction unit Firm A

Subpart (b):

To determine
Total cost.

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