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
A)farmer A will no longer apply manure, and farmer B will not reduce his manure application at all.
B)farmer B will no longer apply manure, and farmer A will not reduce his manure application at all.
C)farmer A and B will each apply 50 tons of manure.
D)farmer A will apply 25 tons of manure, and farmer B will apply 50 tons of manure.

Question

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
A)​farmer A will no longer apply manure, and farmer B will not reduce his manure application at all.
B)​farmer B will no longer apply manure, and farmer A will not reduce his manure application at all.
C)​farmer A and B will each apply 50 tons of manure.
D)​farmer A will apply 25 tons of manure, and farmer B will apply 50 tons of manure.

Quizplus · Accepted Answer

Farmer A will sell all his permits to Farmer B because Farmer B incurs higher losses for not applying manure, making it economically beneficial for Farmer A to sell his permits and for Farmer B to buy them.

Two Farmers, a and B, Each Apply 100 Tons of Manure