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 First Unit of Pollution (Dollars) 90 55 650 Method 1: Regulation Cost of Eliminating the... Second Unit of Pollution Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units. Firm Firm X Firm Y Firm Z (Dollars) 125 70 800 Third Unit of Pollution (Dollars) 180 110 1,500 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. Method 2: Tradable Permits 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) 215 125 1,450 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. 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 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 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.

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 First Unit of Pollution (Dollars) 90 55 650 Method 1: Regulation Cost of Eliminating the... Second Unit of Pollution Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units. Firm Firm X Firm Y Firm Z (Dollars) 125 70 800 Third Unit of Pollution (Dollars) 180 110 1,500 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. Method 2: Tradable Permits 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) 215 125 1,450 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. 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 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 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

	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	90	125	180
Firm Y	55	70	110
Firm Z	650	800	1,500

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 following table with the total cost to each firm of reducing its pollution by 2 units.

Firm	Total Cost of Eliminating Two Units of Pollution
(Dollars)
Firm X
Firm Y
Firm Z

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. 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 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.

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.

$99 ?

$160 ?

$163 ?

$692 ?

$707 ?

Suppose the the government has set the trading price of a permit at $630 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.)

Firm	Initial Pollution Permit Allocation	Action
(Units of pollution)	(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.)

Proposed Method	Total Cost of Eliminating Six Units of Pollution
(Dollars)
Regulation
Tradable Permits

In this case, you can conclude that eliminating pollution is costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

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
(Dollars)
Firm
(Dollars)
(Dollars)
Firm X
90
125
180
Firm Y
55
70
110
Firm Z
650
800
1,500
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 following table with the total cost to each firm of reducing its pollution by 2 units.
Total Cost of Eliminating Two Units of Pollution
Firm
(Dollars)
Firm X
215
Firm Y
125
Firm Z
1,450
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. 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
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.

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.
O $99
O $160
$163
$692
$707
Suppose the the government has set the trading price of a permit at $630 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
Cost of Pollution
Allocation
Eliminated
Reduction
(Units of pollution)
(Units of pollution)
(Dollars)
Firm
Action
Firm
2
Buy one permit
Firm
Y
Buy two permits
Firm
2
Don't buy/sell
Sell one permit
Regulation Versus Tradable Permits
Sell two 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
1,790
Tradable Permits
In this case, you can conclude that eliminating pollution is
costly to society when the government distributes tradable permits than when it
regulates each firm to eliminate a certain amount of pollution.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 40 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.