Considering either a tradable emission permit system

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Two plants are emitting a uniformly mixed polllutant called gunk into the beautiful sky over Tourist Town. The city government decides it can tolerate total emission of no more than 100 kg of gunk per day. Plant G has marginal reduction costs of 100 - 4x and is currently polluting at a level of 25 while plant K has marginal reduction costs of 150 - y and currently pollutes at a level of 150 (x and y are the level of emissions at each plant).

Q: Suppose the authorities are considering either a tradable emission permit system, in which they give half the permits to each firm, or a tax system. If both systems work perfectly, how much will the firms have to pay, in total, for pollution reduction under the two schemes? (assume permits are bought and sold by firms at a price equal to the tax.) Could this explain why Tourist Town would be more likely to adopt a permit giveaway system?

Reference no: EM13732377

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