Split the Difference for a Pollution Permit. Consider two firms, each of which is issued three marketable pollution permits. For firm H, the marginal cost of abatement is $190. For firm L, the...

Split the Difference for a Pollution Permit. Consider two firms, each of which is issued three marketable pollution permits. For firm H, the marginal cost of abatement is $190. For firm L, the marginal cost of abatement is $130.

a. Is there room for a mutually beneficial exchange of one permit? If so, which firm will buy a permit and which firm will sell a permit?

b. If the two firms split the difference, what’s the price of a permit?

c. Suppose that after the exchange of one permit, the marginal cost of abatement for the firm that sold the permit is $170 and the marginal cost of the firm that bought the permit is $150. Will the firms exchange another permit, or are they done trading?

d. What is the savings in abatement cost from allowing firms to buy and sell a permit?