18 August, 22:38

# Two farmers, A and B, each apply 100 tons of manure on their fields. To reduce manure runoff, the government has decided to require a permit for each ton of manure applied. The government gives each farmer 50 tradeable permits. Farmer A incurs losses of \$25 for each ton of manure he does not apply, and Farmer B incurs losses of \$50 for each ton of manure he does not apply. After permit trading, we would expect that

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1. 18 August, 22:53
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Answer: their losses will be \$3,500 if they don't trade the permits and \$2500 if they trade them.

Explanation:

Their losses if they don't trade the permits.

Farmer A = \$25 * 50 = \$1,250

Farmer B = \$50 * 50 = \$2,500

Total losses \$3,750

Their losses if they trade the permits

Farmer B buys farmer A permits and pays \$1,250 and loses \$1,250

Farmer A has losses \$1,250 because he has sold its permits and has received \$1,250 but he can't applied the 100 Tons. So 50 * 25 = \$1,250

Total loss = \$1,250 + \$1,250

Total loss = \$2,500