Two firms, Vesuvius and Etna, are each emitting nine units of pollution, and the government wants to reduce the total level of pollution from the current level of 18 to six. To do this, the government caps each firm’s allowed pollution level at three.

Each firm must now pay to cut pollution levels by six units. A cap-and-trade policy gives each of these firms three permits and allows them to trade permits if they choose. Based on the table below which represents the situation faced by these two firms, what will the firms want to do?

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Vesuvius TC of Pollution MC of TC of Pollution MC of Reduction, Reducing Reducing Reduction, Reducing Reducing Units Pollution Pollution Units Pollution Pollution 1 1 2 6va AwN 3 4 5 8 9 $5 6 8 11 15 22 31 42 57 $ 5 11 19 30 45 67 98 140 197 234567a 8 9 Etna $10 13 17 22 28 37 48 60 75 $ 10 23 40 62 90 127 175 235 310