5. Correcting for negative externalities - Regulation versus tradable permitsSuppose 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 Pollution1.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.FirmCost of Eliminating the...First Unit of PollutionSecond Unit of PollutionThird Unit of Pollution(Dollars)(Dollars)(Dollars)Firm X130165220Firm Y90115140Firm Z6007501,200 Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units (the tables and the rest of the homework question is the screenshot below) Now, Imagine that two government employees proposed alternative plans for reducing pollution by 6 units.Method 1: RegulationThe first government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each firm to reduceIts pollution by 2 units.Complete the folowing table with the total cost to each firm of reducing its polution by 2 units.Total Cost of Eliminating Two Units of Pollution(Dollars)FirmFirm XFirm YFirm zMethod 2: Tradable PermitsMeanwhile, the other employee proposes using a different strategy to achleve the government's goal of reducing pollution in the area from 12 units to6 units. This employee suggests that the government Issue two pollution permits to each firm. For each permit a firm has in Its possession, It can emitI 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 reduceIts 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 negotlationand 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 itdoesn't have to reduce its own pollution emissions. At which of the following prices is firm Y willling to sell one of Its permits to firm Z, but firm X Isnot? Check all that apply.O $123O $212O $219O $569O $595Suppose the the government has set the trading price of a permit at $218 per permit.Complete the following table with the action each firm will take at this permit price, the amount of pollution each fim will elminate, and the amount itcosts 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 theother firms. (Hint: Do not Include the prices paid for permits in the cost of reducing pollution.)Initial Pollution PermitFinal Amount of PollutionCost of PollutionAllocationEliminatedReductionFirm(Units of pollution)Action(Units of pollution)(Dollars)Firm X2Firm Y2Firm z2Regulation Versus Tradable PermitsDetermine the total cost of eliminating six units of pollution using both methods, and enter the amounts In the following table. (Hint: You might needto get Information from previous tasks to complete this table.)Total Cost of Eliminating Six Units of PollutionProposed Method(Dollars)RegulationTradable PermitsIn this case, you can conclude that eliminating pollution isv costly to society when the government distributes tradable permits than when Itregulates each firm to eliminate a certain amount of pollution.

The government tried to reduce pollution that takes place due to various production and consumption…

Answered: Suppose the government wants to reduce…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. Correcting for negative externalities - Regulation versus tradable permits

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	Cost of Eliminating the...
First Unit of Pollution	Second Unit of Pollution	Third Unit of Pollution
(Dollars)	(Dollars)	(Dollars)
Firm X	130	165	220
Firm Y	90	115	140
Firm Z	600	750	1,200

Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units (the tables and the rest of the homework question is the screenshot below)

Now, Imagine that two government employees proposed alternative plans for reducing pollution by 6 units.
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 folowing table with the total cost to each firm of reducing its polution by 2 units.
Total Cost of Eliminating Two Units of Pollution
(Dollars)
Firm
Firm X
Firm Y
Firm z
Method 2: Tradable Permits
Meanwhile, the other employee proposes using a different strategy to achleve the government's goal of reducing pollution in the area from 12 units to
6 units. This employee suggests that the government Issue two pollution permits to each firm. For each permit a firm has in Its possession, It can emit
I 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 negotlation
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 willling to sell one of Its permits to firm Z, but firm X Is
not? Check all that apply.
O $123
O $212
O $219
O $569
O $595
Suppose the the government has set the trading price of a permit at $218 per permit.
Complete the following table with the action each firm will take at this permit price, the amount of pollution each fim will elminate, 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.)
Initial Pollution Permit
Final Amount of Pollution
Cost of Pollution
Allocation
Eliminated
Reduction
Firm
(Units of pollution)
Action
(Units of pollution)
(Dollars)
Firm X
2
Firm Y
2
Firm z
2
Regulation Versus Tradable Permits
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.)
Total Cost of Eliminating Six Units of Pollution
Proposed Method
(Dollars)
Regulation
Tradable Permits
In this case, you can conclude that eliminating pollution is
v costly to society when the government distributes tradable permits than when It
regulates each firm to eliminate a certain amount of pollution.

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