There are three industrial firms in Happy Valley.

The government wants to reduce pollution to 60 units, so it gives each firm 20 tradable pollution permits.
a. Who sells permits and how many do they sell? 

Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation? 

b. How much higher would the costs of pollution reduction be if the permits could not be traded?

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Cost of Reducing Initial Pollution Level Firm Pollution by 1 Unit $20 $30 $10 30 units 40 units 20 units