Homework Clinic
Social Science Clinic => Economics => Macroeconomics => Topic started by: stananza on Nov 23, 2022
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In the town of Big Sky, two firms (Grimy and Pristine) are issued three marketable pollution permits. The table shows the cost of pollution abatement for each firm.
| Permit | Grimy | Pristine |
| 1 | $220 | $160 |
| 2 | $200 | $180 |
| 3 | $190 | $190 |
If the firms can buy and sell permits and the firms agree to split the difference, how many permits are traded? What is the savings in abatement costs by allowing firms to buy and sell a permit?
◦ 0, $0
◦ 3, $270
◦ 1, $60
◦ 2, $80
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2, $80
Grimy and Pristine will trade permits as long as it's beneficial for them to do so.
The first unit of pollution abatement costs Grimy $220 and costs Pristine $160. Because Pristine can abate pollution at a lower cost, it is willing to sell its permit to Grimy for a price above $160. Grimy is willing to purchase the permit at a price lower than $220. Therefore, Pristine will sell a permit to Grimy.
The second unit of pollution abatement costs Grimy $200 and costs Pristine $180. Because Pristine can abate pollution at a lower cost, it is willing to sell its permit to Grimy for a price above $180. Grimy is willing to purchase the permit at a price lower than $200.
Therefore, Pristine will sell another permit to Grimy.
The third unit of pollution abatement costs Grimy and Pristine the same amount, $190. At this price, neither is willing to trade.
Therefore, 2 permits are sold.
Before trade, it would cost Grimy 220 + 200 = $420 for the first two units of pollution abatement.
After trade, Grimy sells the permits to Pristine and Pristine pays 160 + 180 = $340 for the same level of pollution abatement.
Therefore, the savings in abatement due to trade is 420 - 340 = $80