There are three major ferry lines operating on the East River, each generating 100 units of pollution per year. The ferry lines face the costs of reducing pollution that are shown in Table 18P-3.
a. The government has decided it wants to reduce pollution levels by 50 percent and requires each ferry line to cut its pollution in half. What is the cost of pollution reduction for each ferry line, and what is the total cost of pollution reduction?
b. Suppose the government decides to give each ferry line 50 tradable permits. Each permit allows a ferry line to produce one unit of pollution. Which ferry line will buy permits? How many permits will it buy and from whom?
c. What is the total cost of pollution reduction under this system of tradable permits?