question archive Firms Small, Medium, and Large are the only polluters of Big Horn Township in 2015
Firms Small, Medium, and Large are the only polluters of Big Horn Township in 2015
Subject:MarketingPrice:2.88 Bought3
Firms Small, Medium, and Large are the only polluters of Big Horn Township in 2015.
?? Each firm's pollution levels in 2015 and their respective marginal cost of pollution abatement are given below.
?? The township has decreed that its total pollution level in 2016 must decrease from 1200 tonnes in 2015 to 900 tonnes in 2016.
| Firms (Companies) | Pollution Level in 2015 (Tonnes) | Marginal pollution abatement cost ($) | Pollution Permits Received by Each Firm in January 2016 |
| Small | 200 | 120 | 150 |
| Medium | 400 | 100 | 350 |
| Large | 600 | 90 | 400 |
| = 1200 | = 900 |
Assumptions:
- The market price of a permit in 2016 is $105.
- If two sell permits, they must sell an equal number to the buyer of permits.
Is a tradable pollution permit policy a cost-effective method of reducing pollution?
a. Yes
b. No
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Answer: True
This policy is a cost-effective technique as an industry will try to produce more within the limited pollution level. It improves efficiency and encourages firms to employ innovative techniques. It also helps a firm to sell a leftover amount of pollution limit to other firms as it will reduce the cost for both the firms by increasing their revenue. Essentially, the market is now taking into account the cost of pollution while still allowing for the market to efficiently allocate resources.
