Two firms, Gene's Gloves and Wally's Wallets, have factories near a lake. Both firm use a chemical for tanning leather. Some of this chemical runs into the lake. Each year Gene's Gloves dumps 15,000 gallons and Wally's Wallets dumps 25,000 gallons into the lake. A new study has found that fish and other wildlife are negatively impacted by this chemical. The government has decided to cap the total combined amount of the chemical that the factories can dump into the river at 10,000 gallons/year. For an addition $1/gallon, Wally's Wallets is able to substitute each gallon of harmful chemical for one gallon of a harmless alternative. Gene's Gloves needs to use the harmful but more effective chemical to produce gloves. It costs $3/gallon to dispose of the harmful chemical safely. Assume that Gene's Gloves and Wally's Wallets maintain the same level of production under the new environmental restrictions.
1. Suppose the government gives each firm the right to dump 5,000 gallons each. If the firms cannot buy or sell these dumping rights, what is the total cost to both firms for complying with the regulation?
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2. If the firms can buy or sell these rights, how much of the chemical will Gene's Gloves dump into the lake, and how much will the ability to dump 1 gallon of the chemical into the lake cost?
a. 15,000 gallons, between $1 and $3
b. 5,000 gallons, $2
c. 5,000 gallons, no trade will occur
d, 10,000 gallons, less than $1
e. 10,000 gallons, between $1 and $3
f. 0 Gallons, more than $3
3. If the firms can biy or sell these rights, what is the total cost to both firms for complying with the regulation.
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