# Sub: Economics

Topic: Micro Economics

Question: Reducing the emission level and tradable permits.
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Two firms X and Y each dumped 30 tons of sulphur dioxide into the air last year. The EPA wants to reduce total emissions of SO2 by 12 tons this year. The following table gives the cost to each firm of reducing its SO2 output by the amount specified. For instance, if X reduced its SO2 output by 1 ton its cost would increase by 10, and if instead X reduced its SO2 output by 2 tons its cost would increase by 15 (not 10 + 15). (To simplify the calculations, assume that when SO2 output.) Each pollution permit entitles the holder to dump one ton of SO2. Pollution rights can be traded, and the following questions ask for some critical values at equilibrium, under two different scenarios. 1 2 3 4 5 6 7 8 9 10 11 12 X Y 10 15 20 25 40 50 55 60 65 70 75 80 4 6 8 12 16 20 25 30 38 45 55 70

For each of the following two scenarios answer questions A and B. A. By how much will each firm reduce its SO2 output? Which firm will buy permits, which firm will sell them, and how many permits will be exchanged? B. The total amount of money that is exchanged between the two firms must be more than what number and less than what number?

Solution:
The efficiency involves equating marginal damage with the marginal savings to the firm from pollution generation. The efficiency calls for equating the Marginal Savings from emission from the Marginal Damage.
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Sub: Economics

Topic: Micro Economics

Using the above information we can find the reduction of emission. The firm X will reduce emission level up to 5 and the firm Y will reduce its emission level upto 10 when the EPA gives the allowances of \$45 to reduce the emission.

** End of the Solution **
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