In East Lansing area, there are two similar firms producing plastic bottles. They save money from polluting. Each firm’s marginal saving from emitting an amount e is given by 10-2e. These two firms differ in their impact on ambient pollution concentrations (E.g., they may be located at different distance from the central business district). One unit of emissions from firm 1 results in one unit of ambient pollution. Firm 2 has twice the impact on the ambient environment from the same amount of emissions.

a. What are the transfer coefficients for each of the two firms? 

b. If firm 1 is given two emission permits and firm 2 is given four emission permits and they are allowed to trade, how many permits will each firm end up with and what will be the price? How much ambient pollution will there be? 

c. If instead each firm is given two ambient pollution permits and trading takes place, how much will each firm end up emitting and what will be the permit price? How much ambient pollution will there be? 

d. Somehow ambient pollution is found to be one unit more than what your analysis in part c suggests. It is possible that either or both firms are emitting more than what their permits allow. In response to this, the city government has now instituted a program whereby it will audit each firm with a probability of 0.01 in each period. If a firm is found in violation, it must pay a fine of $1 million per unit of emissions in excess of the permits it has. What would be the level of ambient pollution now? Why?

Answer rating: 100% (QA)

a What are the transfer coefficients for each of the two firms ANSWER Firm 1 102e Firm 2 2102e WORKING We can calculate the transfer coefficient for each firm by taking the marginal saving from emitti... View the full answer