Two Firms, a and B, Each Currently Dump 20 Tons

question 244

Multiple Choice

Two firms, A and B, each currently dump 20 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 gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 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.

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