Suppose the the government has set the trading price of a permit at $355 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 Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Proposed Method Regulation Action Sell one permit Buy two permits Sell one permit Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) Total Cost of Eliminating Six Units of Pollution (Dollars) 1,430 775 000 3 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.) 3 Cost of Pollution Reduction (Dollars) 415 0 360 In this case, you can conclude that eliminating pollution is more 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.
Suppose the the government has set the trading price of a permit at $355 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 Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Proposed Method Regulation Action Sell one permit Buy two permits Sell one permit Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) Total Cost of Eliminating Six Units of Pollution (Dollars) 1,430 775 000 3 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.) 3 Cost of Pollution Reduction (Dollars) 415 0 360 In this case, you can conclude that eliminating pollution is more 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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
Firm A
Firm B
Firm C
First Unit of Pollution
(Dollars)
130
600
90
Cost of Eliminating the...
Second Unit of Pollution
(Dollars)
165
750
115
Third Unit of Pollution
(Dollars)
220
1,200
140
Transcribed Image Text:Suppose the the government has set the trading price of a permit at $355 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
Firm A
Firm B
Firm C
Initial Pollution Permit
Allocation
(Units of pollution)
2
2
2
Regulation Versus Tradable Permits
Proposed Method
Regulation
Action
Tradable Permits
Sell one permit
Buy two permits
Sell one permit
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)
3
0
3
Total Cost of Eliminating Six Units of Pollution
(Dollars)
1,430
775
Cost of Pollution
Reduction
(Dollars)
415
0
360
In this case, you can conclude that eliminating pollution is more 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.
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