Two firms, A and B, each currently dump 10 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 give each
firm 10 pollution permits, which it can either use or sell to the
other firm. It costs Firm A $300 for each ton of pollution that it
eliminates before it reaches the river, and it costs Firm B $150
for each ton of pollution that it eliminates before it reaches the
river. After the two firms buy or sell pollution permits from each
other, we would expect that
a. Firm A will no longer pollute, and Firm B will not reduce its
pollution at all. b. Firm B will no longer pollute, and Firm A will
not reduce its pollution at all.
c. Firm A will dump 10 tons of pollution into the river, and
Firm B will dump 10 tons of pollution into the river.
d. Firm A will increase its pollution and Firm B will reduce its
pollution.
