Question: Two companies, Toxic Waste Management and Sludge Industries, both pollute a nearby lake. Each firm dumps 1,000 gallons of goo into the lake every day. As a consequence, the lake has lost its clarity and the fish are dying. Local residents want to see the lake restored. But Toxic Waste's production process depends heavily on being able to dump the goo into the lake. It would cost Toxic Waste $10 per gallon to clean up the goo it generates. Sludge can clean up its goo at a cost of $2 per gallon.
a. If the local government cuts the legal goo emissions in half for each firm, what are the costs to each firm to comply with the law? What is the total cost to both firms in meeting the goo-emissions standard?
b. Another way of cutting goo emissions in half is to assign each firm tradable pollution permits that allow 500 gallons of goo to be dumped into the lake every day. Under this approach, will each firm still dump 500 gallons of goo? Why or why not?