Two textile dying firms in a competitive industry discharge water contaminated with dye chemicals into a nearby lake. The two firms have benefit functions for pollution B = 15q - 3/2q2 and B = 10q- q2 where B is the private cost saved from not treating the water discharged, and q is the level of pollution by each firm. The cost of pollution on the community is C = 15q2. (a) What is the market solution for each firm's output of pollution? (b) What is the societally - optimal level of pollution? (c) What is the welfare gain of the societally - optimal level relative to the market solution? (include a diagram) (d) Suppose government imposes by regulation a quota on each firm to reduce their pollution by 25% relative to their regulation - unconstrained amounts. Is this an efficient level of pollution? Is this a least - cost way of achieving pollution reductions? (e) Say the government allows the quotas to become tradable permits. What transactions would you expect, what would be the competitive price of the tradable permits, and what would be the cost savings? (f) It turns out that the government does not have the political clout to get a quota or tradeable permit system passed. Can they implement their optimal policy through a subsidy program? If so, how much would they need to pay the firms per unit of pollution avoided?
Two textile dying firms in a competitive industry discharge water contaminated with dye chemicals into a nearby lake. The two firms have benefit functions for pollution B = 15q - 3/2q2 and B = 10q- q2 where B is the private cost saved from not treating the water discharged, and q is the level of pollution by each firm. The cost of pollution on the community is C = 15q2. (a) What is the market solution for each firm's output of pollution? (b) What is the societally - optimal level of pollution? (c) What is the welfare gain of the societally - optimal level relative to the market solution? (include a diagram) (d) Suppose government imposes by regulation a quota on each firm to reduce their pollution by 25% relative to their regulation - unconstrained amounts. Is this an efficient level of pollution? Is this a least - cost way of achieving pollution reductions? (e) Say the government allows the quotas to become tradable permits. What transactions would you expect, what would be the competitive price of the tradable permits, and what would be the cost savings? (f) It turns out that the government does not have the political clout to get a quota or tradeable permit system passed. Can they implement their optimal policy through a subsidy program? If so, how much would they need to pay the firms per unit of pollution avoided?
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Chapter17: Externalities And The Environment
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Transcribed Image Text:Two textile dying firms in a competitive industry
discharge water contaminated with dye chemicals into
a nearby lake. The two firms have benefit functions for
pollution B = 15q - 3/2q2 and B = 10q- q2 where B
is the private cost saved from not treating the water
discharged, and q is the level of pollution by each firm.
The cost of pollution on the community is C = 15q2.
(a) What is the market solution for each firm's output of
pollution?
(b) What is the societally - optimal level of pollution?
(c) What is the welfare gain of the societally - optimal
level relative to the market solution? (include a diagram)
(d) Suppose government imposes by regulation a quota
on each firm to reduce their pollution by 25% relative to
their regulation - unconstrained amounts. Is this an
efficient level of pollution? Is this a least - cost way of
achieving pollution reductions?
(e) Say the government allows the quotas to become
tradable permits. What transactions would you
expect, what would be the competitive price of the
tradable permits, and what would be the cost savings?
(f) It turns out that the government does not have the
political clout to get a quota or tradeable permit system
passed. Can they implement their optimal policy
through a subsidy program? If so, how much would
they need to pay the firms per unit of pollution avoided?
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