Two plants are emitting a uniformly mixed pollutant called gunk into the beautiful sky over Tourist Town. The city government decides that the total emissions must be reduced by 100 kgs of gunk per day. Plant G has marginal reduction costs of MAC1=5A1, and is currently polluting at a level of 25, while plant K has marginal reduction costs of MAC2=A2, and currently pollutes at a level of 150. (A1 and A2 are the level of emissions at each plant).
1. Suppose the authorities are considering a tradable emission permit system in which they givehalf the permits to each firm, and firms are free to buy or sell permits to each other. How manypermits need to be issued in order to achieve the goal of reducing 100 kgs of gunk per day? Howmany permits will be traded between the two plants (who sells and who buys)?
2. If both systems (the pollution tax and the permit program) work perfectly, how much will thefirms have to pay, in total, under each scheme? Could this explain why Tourist Town would be more likely to adopt a permit give-away system?