I'm really struggling with this microeconomics problem, and I'm not sure how to complete part b. Any help/suggestions whatsoever would be greatly appreciated.
Thank you very kindly.
Socrates Corp., Plato Corp., and Aristotle Corp. each emit 10 tons of pollution per day.
Socrates Corp. could reduce its pollution at a cost of $20 per ton,
Plato Corp. could reduce its pollution at a cost of $40 per ton, and
Aristotle Corp. could reduce its pollution at a cost of $60 per ton.
The Environmental Protection Agency wants to reduce total pollution from 30 tons to 15 tons.
a) If the EPA requires each firm to reduce its pollution to 5 tons per day, what would be the total cost of pollution reduction?
b) If the EPA instead gives each firm pollution allowances for 5 tons per day, and these allowances are tradable, what trade(s) would take place?
How much would each firm then pollute, and how much would each firm reduce its pollution? (Be careful. Make sure that total pollution for the three firms together is still 15 tons.)
What would be the total cost of pollution reduction?
c) Assume that the price of tradable allowances would be $40 (per ton). Show how both the buyer(s) and seller(s) of pollution allowances would gain from the second policy compared to the first.
d) For one bonus point, explain why $40 (per ton) would definitely be the trading price for pollution allowances.