Question

S. Correcting for negative externalities-Regulation versus tradable permits 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) 80 550 75 Cost of Eliminating the.. Second Unit of Pollution (Dollars) 130 700 90 Third Unit of Pollution (Dollars) 210 1,075 130

Answer 1

Method 2: Tradable Permits

The answer should be above firm's Z and X third unit of pollution so it should be above 130 and 210

So, check $364 and $475

Suppose the government has set the trading price of a permit at $147 per permit

Regulation vs Tradable Permits:

Regulation: 210+1250+165 = 1625

Tradable Permits: 210+550+295 = 1055

In this case,you can conclude that eliminating pollution is more costly to society when the government regulates each firm.