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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Business

Coby Chaney

4 August, 12:15

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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Savannah Richardson · Answer 1

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