Smog Corporation and Grimy Corporation Emit Pollution in Their Production

Essay

Smog Corporation and Grimy Corporation emit pollution in their production processes. The local government has established a standard for the pollution levels of Smog Corporation and Grimy Corporation of 25,000 units of pollution. To ensure this level of pollution, the government has allocated 15,000 pollution permits to Smog Corporation and 10,000 pollution permits to Grimy Corporation. Smog Corporation has the following demand function for pollution emission permits: Grimy Corporation's demand function for pollution emission permits is: Is the government's allocation of pollution permits efficient? If the government allowed the corporations to trade permits, would the firms be motivated to trade? If so, what would be the efficient level of trading?