1. Two textile dying firms in a competitive industry discharge water contaminated with dye chemicals into a nearby lake. The two firms have benefit functions for pollution 15q-q² and B 10q q² where B is the private cost saved from not treating B = = - the water discharged, and q is the level of pollution by each firm. The cost of pollution on the community is C = (a) What is the market solution for each firm's output of pollution? (b) What is the societally-optimal level of pollution? What is the welfare gain of the societally-optimal level relative to the market solution? (include a diagram) (d) Suppose government imposes by regulation a quota on each firm to reduce their pollution by 25% relative to their regulation-unconstrained amounts. Is this an efficient level of pollution? Is this a least-cost way of achieving pollution reduc- tions? (e) Say the government allows the quotas to become tradable permits. What trans- actions would you expect, what would be the competitive price of the tradable permits, and what would be the cost savings? (f) It turns out that the government does not have the political clout to get a quota or tradeable permit system passed. Can they implement their optimal policy through a subsidy program? If so, how much would they need to pay the firms per unit of pollution avoided?
1. Two textile dying firms in a competitive industry discharge water contaminated with dye chemicals into a nearby lake. The two firms have benefit functions for pollution 15q-q² and B 10q q² where B is the private cost saved from not treating B = = - the water discharged, and q is the level of pollution by each firm. The cost of pollution on the community is C = (a) What is the market solution for each firm's output of pollution? (b) What is the societally-optimal level of pollution? What is the welfare gain of the societally-optimal level relative to the market solution? (include a diagram) (d) Suppose government imposes by regulation a quota on each firm to reduce their pollution by 25% relative to their regulation-unconstrained amounts. Is this an efficient level of pollution? Is this a least-cost way of achieving pollution reduc- tions? (e) Say the government allows the quotas to become tradable permits. What trans- actions would you expect, what would be the competitive price of the tradable permits, and what would be the cost savings? (f) It turns out that the government does not have the political clout to get a quota or tradeable permit system passed. Can they implement their optimal policy through a subsidy program? If so, how much would they need to pay the firms per unit of pollution avoided?
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter30: Market Failure: Externalities, Public Goods, And Asymmetric Information
Section: Chapter Questions
Problem 14QP
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Transcribed Image Text:1. Two textile dying firms in a competitive industry discharge water contaminated with
dye chemicals into a nearby lake. The two firms have benefit functions for pollution
15q-q² and B 10q q² where B is the private cost saved from not treating
B =
=
-
the water discharged, and q is the level of pollution by each firm. The cost of pollution
on the community is C =
(a) What is the market solution for each firm's output of pollution?
(b) What is the societally-optimal level of pollution?
What is the welfare gain of the societally-optimal level relative to the market
solution? (include a diagram)
(d) Suppose government imposes by regulation a quota on each firm to reduce their
pollution by 25% relative to their regulation-unconstrained amounts. Is this an
efficient level of pollution? Is this a least-cost way of achieving pollution reduc-
tions?
(e) Say the government allows the quotas to become tradable permits. What trans-
actions would you expect, what would be the competitive price of the tradable
permits, and what would be the cost savings?
(f) It turns out that the government does not have the political clout to get a quota
or tradeable permit system passed. Can they implement their optimal policy
through a subsidy program? If so, how much would they need to pay the firms
per unit of pollution avoided?
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