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?
A)$3,750; $2,500
B)$2,500; $3,750
C)$5,000; $2,500
D)$3,750; $3,750

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 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?
A)​$3,750; $2,500
B)​$2,500; $3,750
C)​$5,000; $2,500
D)$3,750; $3,750

Quizplus · Accepted Answer

The total cost of reducing runoff if firms are not allowed to buy and sell permits from each other is $3,750. This is because Farmer A will apply 50 tons of manure and incur losses of $25 for each of the remaining 50 tons, for a total loss of $1,250. Farmer B will apply 50 tons of manure and incur losses of $50 for each of the remaining 50 tons, for a total loss of $2,500. The total cost is therefore $1,250 + $2,500 = $3,750.If the firms are allowed to buy and sell permits from each other, then Farmer A will sell 50 permits to Farmer B. Farmer B will then apply 100 tons of manure and incur no losses. Farmer A will apply 0 tons of manure and incur losses of $25 for each of the 100 tons, for a total loss of $2,500. The total cost is therefore $2,500.

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