Question

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... Second Unit of Pollution (Dollars) First Unit of Pollution (Dollars) 130 Firm Third Unit of Pollution (Dollars) 220 Firm X 165 Firm Y 90 115 140 1,200 Firm z 600 750 Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units.

Answer 1

Method 1 Regulation

Firm X = 130+165=295

Firm Y= 90+115 = 205

Firm Z= 600+750 = 1350

Method 2 Tradable permits

Y is willing to sell buy X is not so

select 212 and 219

Firm	Initial permit	Action	Final Amount	Cost of reduction
X	2	don't buy/sell	2	295
Y	2	sell 1 permit	3	345
Z	2	buy 1 permit	1	600

Regulation vs Tradable permits

Regulation=295+205+1350 = 1850

Tradable permits = 295+345+600 = 1240

In this case you can conclude that eliminating pollution is More costly to society when the government regulates