firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit, while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless. Because firm Z has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Y and a permit from firm X, so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm Y willing to sell one of its permits to firm Z, but firm X is not? Check all that apply. $123 $212 $219 $569 $595 Suppose the owners of the three firms get together and agree on a trading price of $218 per permit. 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 purchases 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 X Firm Y Firm Z Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Action Proposed Method Regulation Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) 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.) Cost of Pollution Reduction (Dollars) Total Cost of Eliminating Six Units of Pollution (Dollars) costly to society when the In this case, you can conclude that eliminating pollution is government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Confused and uncertain how to solve properly Blank one, two and three: a. Buy one permit b. Buy two permits c. Don’t buy/sell d. Sell one permit e. Sell two permits  Blank four: Less or more
Suppose the government wants to reduce the total pollution emitted by three local firms.
Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If
the government wants to reduce total pollution in the area to 6 units, it can choose between the
following two methods:
Available Methods to Reduce Pollution
1. The government sets pollution standards using regulation.
2. The government allocates tradable pollution permits.
Each firm faces different costs, so reducing pollution is more difficult for some firms than others.
The following table shows the cost each firm faces to eliminate each unit of pollution. For each
firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution)
is prohibitively expensive.
Firm
Firm X
Firm Y
Firm Z
Cost of Eliminating the...
First Unit of Pollution Second Unit of Pollution Third Unit of Pollution -
(Dollars)
(Dollars)
130
220
90
140
600
1,200
(Dollars)
165
115
750
Now, imagine that two government employees propose alternative plans for reducing pollution by 6
units.
Firm
Firm X
Firm Y
Firm Z
Method 1: Regulation
The first government employee suggests limiting pollution through regulation. To meet the
pollution goal, the government requires each firm to reduce its pollution by 2 units.
Complete the following table with the total cost to each firm of reducing its pollution by 2 units.
Total Cost of Eliminating Two Units of Pollution
(Dollars)
Method 2: Tradable Permits
Meanwhile, the other employee proposes using a different strategy to achieve the government's
goal of reducing pollution in the area from 12 units to 6 units. He suggests that the government
issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1
unit of pollution. Firms are free to trade pollution permits with one another (that is, buy and sell
them) as long as both firms can agree on a price. For example, if firm X agrees to sell a permit to
firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to
reduce its pollution by only 1 unit, while firm X would end up with only one permit and would have
to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.
te it thinks it might be better off buying a permit
Transcribed Image Text:Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government wants to reduce total pollution in the area to 6 units, it can choose between the following two methods: Available Methods to Reduce Pollution 1. The government sets pollution standards using regulation. 2. The government allocates tradable pollution permits. Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The following table shows the cost each firm faces to eliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive. Firm Firm X Firm Y Firm Z Cost of Eliminating the... First Unit of Pollution Second Unit of Pollution Third Unit of Pollution - (Dollars) (Dollars) 130 220 90 140 600 1,200 (Dollars) 165 115 750 Now, imagine that two government employees propose alternative plans for reducing pollution by 6 units. Firm Firm X Firm Y Firm Z Method 1: Regulation The first government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units. Complete the following table with the total cost to each firm of reducing its pollution by 2 units. Total Cost of Eliminating Two Units of Pollution (Dollars) Method 2: Tradable Permits Meanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to 6 units. He suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firms are free to trade pollution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit, while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless. te it thinks it might be better off buying a permit
firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to
reduce its pollution by only 1 unit, while firm X would end up with only one permit and would have
to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.
Because firm Z has high pollution-reduction costs, it thinks it might be better off buying a permit
from firm Y and a permit from firm X, so that it doesn't have to reduce its own pollution emissions.
At which of the following prices is firm Y willing to sell one of its permits to firm Z, but firm X is
not? Check all that apply.
Suppose the owners of the three firms get together and agree on a trading price of $218 per
permit.
$123
$212
$219
$569
$595
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 purchases 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
X
Firm
Y
Firm
Z
Initial Pollution
Permit Allocation
(Units of pollution)
2
2
2
Regulation Versus Tradable Permits
Action
Proposed Method
Regulation
Tradable Permits
Final Amount of
Pollution
Eliminated
(Units of
pollution)
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.)
Cost of
Pollution
Reduction
(Dollars)
Total Cost of Eliminating Six Units of Pollution
(Dollars)
costly to society when the
In this case, you can conclude that eliminating pollution is
government distributes tradable permits than when it regulates each firm to eliminate a certain
amount of pollution.
Transcribed Image Text:firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit, while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless. Because firm Z has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Y and a permit from firm X, so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm Y willing to sell one of its permits to firm Z, but firm X is not? Check all that apply. Suppose the owners of the three firms get together and agree on a trading price of $218 per permit. $123 $212 $219 $569 $595 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 purchases 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 X Firm Y Firm Z Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Action Proposed Method Regulation Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) 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.) Cost of Pollution Reduction (Dollars) Total Cost of Eliminating Six Units of Pollution (Dollars) costly to society when the In this case, you can conclude that eliminating pollution is government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.
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