7. 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 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. What is the total cost of reducing runoff if firms are not allowed to buy and sell permits from each other? What is the total cost of reducing runoff if the firms are allowed to buy and sell permits from each other?

Question

Jaylon Santiago

Business

1 July, 03:55

7. 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 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. What is the total cost of reducing runoff if firms are not allowed to buy and sell permits from each other? What is the total cost of reducing runoff if the firms are allowed to buy and sell permits from each other?

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Answers (1)

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Brooke Ali · Answer 1

1) The total cost of reducing runoff if the farmers are not allowed to trade permits is:

total loss = farmer A' loss + farmer B's loss

where:

farmer A's loss = (100 - 50) x $25 = $1,250 farmer B's loss = (100 - 50) x $50 = $2,500

total loss = $1,250 + $2,500 = $3,750

2) The total cost of reducing runoff if the farmers are allowed to trade permits is:

Since farmer A will be willing to sell his permits to farmer B for a price that is ≥ $25 and ≤ $50, the total cost of reducing runoff is $2,500.

If farmer A sells his runoff permit at a price higher than $25 his costs will decrease but farmer B's costs will increase, so any gain due to price change is offset by the other farmer's loss.