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Asked by Denise Rodriguez on Jun 13, 2024

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Smog Corporation and Grimy Corporation emit pollution in their production processes. The local government has established a standard for the pollution levels of Smog Corporation and Grimy Corporation of 25,000 units of pollution. To ensure this level of pollution, the government has allocated 15,000 pollution permits to Smog Corporation and 10,000 pollution permits to Grimy Corporation. Smog Corporation has the following demand function for pollution emission permits: Smog Corporation and Grimy Corporation emit pollution in their production processes. The local government has established a standard for the pollution levels of Smog Corporation and Grimy Corporation of 25,000 units of pollution. To ensure this level of pollution, the government has allocated 15,000 pollution permits to Smog Corporation and 10,000 pollution permits to Grimy Corporation. Smog Corporation has the following demand function for pollution emission permits: Grimy Corporation's demand function for pollution emission permits is: Is the government's allocation of pollution permits efficient? If the government allowed the corporations to trade permits, would the firms be motivated to trade? If so, what would be the efficient level of trading? Grimy Corporation's demand function for pollution emission permits is: Smog Corporation and Grimy Corporation emit pollution in their production processes. The local government has established a standard for the pollution levels of Smog Corporation and Grimy Corporation of 25,000 units of pollution. To ensure this level of pollution, the government has allocated 15,000 pollution permits to Smog Corporation and 10,000 pollution permits to Grimy Corporation. Smog Corporation has the following demand function for pollution emission permits: Grimy Corporation's demand function for pollution emission permits is: Is the government's allocation of pollution permits efficient? If the government allowed the corporations to trade permits, would the firms be motivated to trade? If so, what would be the efficient level of trading? Is the government's allocation of pollution permits efficient? If the government allowed the corporations to trade permits, would the firms be motivated to trade? If so, what would be the efficient level of trading?

Pollution Permits

Government-issued licenses allowing the holder to emit a certain amount of pollution; used as a regulatory tool to control and reduce environmental damage.

Pollution Levels

The concentration of pollutants in the environment, affecting air, water, and soil quality.

  • Acquire knowledge about the concept of marginal external costs and benefits associated with economic practices.
  • Investigate the effects of pollution on economic decision-making and evaluate the success of pollution fees and permits in attaining social ideal outcomes.
  • Apply economic principles to environmental issues, such as national park visitation and pollution permit trading.
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Raahim PathanJun 18, 2024
Final Answer :
The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. Grimy Corporation's marginal benefit of polluting is: The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. At the current pollution allocation, Smog Corporation's marginal benefit is: The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. However, Grimy corporation's marginal benefit is: The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. Note that The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. So, the
MB The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. = MB The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. ⇒
efficient allocation requires: The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. The current allocation of permits is not efficient. We may rearrange each firms demand function for pollution permits to determine their marginal benefit of emitting pollution. This implies Smog Corporations marginal benefit of polluting is: Grimy Corporation's marginal benefit of polluting is: At the current pollution allocation, Smog Corporation's marginal benefit is: However, Grimy corporation's marginal benefit is: Since the marginal benefit of polluting is much higher to Grimy Corporation, the current allocation of pollution permits is not optimal. Grimy Corporation is willing to pay $7,500 for a permit at the government's allocation while the marginal value of a permit to Smog Corporation is zero. Thus, there is a trade opportunity. If the government allowed the firms to trade the permits, the optimal allocation sets: Note that So, the MB = MB ⇒ efficient allocation requires: = 14,000. The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits. = 14,000.
The efficient level of permits for Grimy Corporation is then 11,000. The marginal benefit of a permit for Smog Corporation if it uses 14,000 permits is $5,000. Grimy Corporation is willing to pay $5,000 per permit to purchase 1,000 permits from Smog Corporation. Both firms are better off and society has achieved the efficient allocation of pollution permits.

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