Smog Corporation and Grimy Corporation Emit Pollution in Their Production

question 49

Essay

Smog Corporation and Grimy Corporation emit pollution in their production processes. The local government has established a standard for the pollution levels of Smog Corporation and Grimy Corporation of 25,000 units of pollution. To ensure this level of pollution is achieved efficiently, the government sells permits to the corporations that entitle them to emit a unit of pollution. Smog Corporation has the following demand function for pollution emission permits: Grimy Corporation's demand function for pollution emission permits is: What is the equilibrium price of pollution permits? If the government makes the standard more stringent and allows only 15,000 units of pollution, what happens to the equilibrium price of pollution permits?

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Definitions:

Decreasing-cost Industry

An industry where the costs of production decrease as the industry grows due to economies of scale.

Long-run Equilibrium

A state in which all factors of production and outputs are fully adjusted to economic conditions, leading to stable prices and optimal resource allocation.

Market Price

The current price at which an asset or service can be bought or sold in a particular market.

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs, representing the surplus revenue after all costs have been accounted for.