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:

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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.
Cost of Eliminating the...
First Unit of Pollution
Second Unit of Pollution
Third Unit of Pollution
Firm
(Dollars)
(Dollars)
(Dollars)
Firm X
80
100
150
Firm Y
450
800
1,050
Firm Z
95
120
200
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.
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. Cost of Eliminating the... First Unit of Pollution Second Unit of Pollution Third Unit of Pollution Firm (Dollars) (Dollars) (Dollars) Firm X 80 100 150 Firm Y 450 800 1,050 Firm Z 95 120 200 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.
Suppose the the government has set the trading price of a permit at $182 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 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
Allocation
Cost of Pollution
Eliminated
Reduction
Firm
(Units of pollution)
Action
(Units of pollution)
(Dollars)
Firm
Firm
Y
Firm Z
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
costly to society when the government regulates each firm to eliminate a
In this case, you can conclude that eliminating pollution is
certain amount of pollution than when it allocates pollution permits that can be bought and sold.
2.
2.
Transcribed Image Text:Suppose the the government has set the trading price of a permit at $182 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 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 Allocation Cost of Pollution Eliminated Reduction Firm (Units of pollution) Action (Units of pollution) (Dollars) Firm Firm Y Firm Z 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 costly to society when the government regulates each firm to eliminate a In this case, you can conclude that eliminating pollution is certain amount of pollution than when it allocates pollution permits that can be bought and sold. 2. 2.
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