**Pollution Permit Allocation and Cost Analysis**### Table: Initial Pollution Permit Allocation and Action Plan**Instructions:**Complete the table based on the actions each firm will take at the given permit price. Determine the pollution each firm will eliminate and the related cost. Assume a firm buying two permits buys one from each of the other firms.**Hint:** Do not include the prices paid for permits in the cost of reducing pollution.| Firm | Initial Pollution Permit Allocation (Units of pollution) | Action | Final Amount of Pollution Eliminated (Units of pollution) | Cost of Pollution Reduction (Dollars) ||--------|-----------------------------------------------------------|--------|----------------------------------------------------------|---------------------------------------|| Firm A | 2 | | | || Firm B | 2 | | | || Firm C | 2 | | | |### Section: Regulation Versus Tradable PermitsDetermine the total cost of eliminating six units of pollution using both regulation and tradable permits methods. Fill in the amounts.**Hint:** Use information from previous tasks.**Table: Total Cost of Eliminating Six Units of Pollution**| Proposed Method | Total Cost (Dollars) ||---------------------|----------------------|| Regulation | || Tradable Permits | |### Conclusion:In this scenario, conclude whether eliminating pollution is **[more/less]** costly to society when the government regulates each firm to eliminate a specific amount versus when it allocates tradable pollution permits. **5. Correcting for Negative Externalities - Regulation versus Tradable Permits**Suppose a municipality votes to reduce the combined pollution introduced by three local companies. Presently, each firm creates 4 units of pollution in the area, for a total of 12 pollution units. The government can reduce total pollution in the area to 6 units by choosing between the following two methods:### Methods to Reduce Pollution1. The government imposes pollution standards using regulation.2. The government issues tradable pollution permits.The costs faced by each firm are different, so it is more difficult for some firms to reduce pollution than others. The following table shows the cost faced by each firm to eliminate each unit of pollution. Assume that the cost of eliminating all 4 units of pollution (that is, reducing pollution to zero) is prohibitively expensive for all three firms.| Firm | Cost of Eliminating the... | First Unit of Pollution (Dollars) | Second Unit of Pollution (Dollars) | Third Unit of Pollution (Dollars) ||--------|----------------------------|----------------------------------|-----------------------------------|----------------------------------|| Firm A | | 95 | 120 | 200 || Firm B | | 450 | 800 | 1,050 || Firm C | | 80 | 100 | 150 |Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units.

In economics, we make the assumption that any transaction involving two people must be true or it would not have happened. There may be times when a third party living close to a potentially polluting factory will be impacted.Solution:- The following costs will be paid when the first way of regulation is implemented because each company is required to cut pollution by 2 units. • Pollution abatement cost to firm A = 95 + 120 = $200 • Pollution abatement cost to firm B = 450 + 800 = $1050 • Pollution abatement cost to firm C = 80 + 100 = $180 So, total cost of pollution abatement = 200 + 1050 + 180 = $1430 Firm B would incur higher costs for reduction because only Firm A & C would cut emissions if licences could be traded. In order to pollute more, it would purchase the permits. This indicates that A & C is the source of all 6 units of pollution reduction. The result is the condition described below: • Pollution abatement cost to firm A = 95 + 120 + 200 = $415 • Pollution abatement cost to firm B = 0 • Pollution abatement cost to firm C = 80 + 100 + 180 = $360 So, total cost of pollution abatement = $415 + $360 = $775 Table:- Firm Initial Pollution permits allocation Actions Final Amount of pollution eliminated Cost of pollution Firm A 2 Sell 1 permit 3 415 Firm B 2 Buy2 permit 0 0 Firm C 2 Sell 1 permit 3 360Proposed Method Total cost of eliminating six units of pollution REGULATION 1430 TRADABLE PERMITS 775 In these case,we concluded that eliminating pollution in MORE to the society when the government distributes tradable permits when it regulates each firm to eliminate a certain amount of pollution.

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Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) Regulation Versus Tradable Permits 2 Proposed Method Regulation Tradable Permits Action Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.) Final Amount of Pollution Eliminated (Units of pollution) Total Cost of Eliminating Six Units of Pollution (Dollars) Cost of Pollution Reduction (Dollars) In this case, you can conclude that eliminating pollution is costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.

Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) Regulation Versus Tradable Permits 2 Proposed Method Regulation Tradable Permits Action Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.) Final Amount of Pollution Eliminated (Units of pollution) Total Cost of Eliminating Six Units of Pollution (Dollars) Cost of Pollution Reduction (Dollars) In this case, you can conclude that eliminating pollution is costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

**Pollution Permit Allocation and Cost Analysis**

### Table: Initial Pollution Permit Allocation and Action Plan

**Instructions:**
Complete the table based on the actions each firm will take at the given permit price. Determine the pollution each firm will eliminate and the related cost. Assume a firm buying two permits buys one from each of the other firms.

**Hint:** Do not include the prices paid for permits in the cost of reducing pollution.

| Firm | Initial Pollution Permit Allocation (Units of pollution) | Action | Final Amount of Pollution Eliminated (Units of pollution) | Cost of Pollution Reduction (Dollars) |
|--------|-----------------------------------------------------------|--------|----------------------------------------------------------|---------------------------------------|
| Firm A | 2 | | | |
| Firm B | 2 | | | |
| Firm C | 2 | | | |

### Section: Regulation Versus Tradable Permits

Determine the total cost of eliminating six units of pollution using both regulation and tradable permits methods. Fill in the amounts.

**Hint:** Use information from previous tasks.

**Table: Total Cost of Eliminating Six Units of Pollution**

| Proposed Method | Total Cost (Dollars) |
|---------------------|----------------------|
| Regulation | |
| Tradable Permits | |

### Conclusion:
In this scenario, conclude whether eliminating pollution is **[more/less]** costly to society when the government regulates each firm to eliminate a specific amount versus when it allocates tradable pollution permits.

**5. Correcting for Negative Externalities - Regulation versus Tradable Permits**

Suppose a municipality votes to reduce the combined pollution introduced by three local companies. Presently, each firm creates 4 units of pollution in the area, for a total of 12 pollution units. The government can reduce total pollution in the area to 6 units by choosing between the following two methods:

### Methods to Reduce Pollution

1. The government imposes pollution standards using regulation.
2. The government issues tradable pollution permits.

The costs faced by each firm are different, so it is more difficult for some firms to reduce pollution than others. The following table shows the cost faced by each firm to eliminate each unit of pollution. Assume that the cost of eliminating all 4 units of pollution (that is, reducing pollution to zero) is prohibitively expensive for all three firms.

| Firm | Cost of Eliminating the... | First Unit of Pollution (Dollars) | Second Unit of Pollution (Dollars) | Third Unit of Pollution (Dollars) |
|--------|----------------------------|----------------------------------|-----------------------------------|----------------------------------|
| Firm A | | 95 | 120 | 200 |
| Firm B | | 450 | 800 | 1,050 |
| Firm C | | 80 | 100 | 150 |

Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units.

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