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  3. the table below shows four firms the amount each pollutes...

Question: the table below shows four firms the amount each pollutes...

Question details

The table below shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution.

Firm

Total discharge in tons

Marginal cost of clean/ton

Total cost of cleanup

A

60

$5

$300

B

70

$8

$560

C

80

$7.50

$600

D

90

$4

$360

The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes.

Refer to the table above to answer the next 4 questions. If the goal of the government is to reduce pollution by 50%, the cheapest way would be to have: which firm(s) to stop discharging?

        

b. Assume that these firms want to maximize profits. If the government wishes to cut discharge by 50%, it could do so by establishing an effluent fee of $5.50. Why? Explain.

           

c. If the government establishes a regulation requiring each company to reduce pollution by 50%, what would be spent on reducing pollution?

           

d. Suppose that the government gives each company a pollution permit equal to 50% of its present discharge. However, companies are allowed to reduce pollution more than 50% and sell their permit or reduce less than 50% and buy a permit from another company. The market price of the permits should be between $5.00 and $7.50. If firms maximize profits, what would happen? Explain your answer. Not just pick an answer.

            A) Each firm would reduce pollution by 50%.

            B) Firms A and D would eliminate pollution and sell their permits to B and C, who would continue to pollute as before.

            C) Firms B and C would eliminate pollution and sell their permits to A and D, who would continue to pollute as before.

            D) There is not enough information to answer this question.

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