Question

5. Correcting for negative externalities - Regulation versus tradablepermits 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. First Unit of Pollution (Dollars) Cost of Eliminating the... Second Unit of Pollution (Dollars) 70 Firm Firm X 55 Third Unit of Pollution (Dollars) 110 1,500 180 Firm Y 800 650 90 Firm z 125 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.

note: this is all one question, I only need answers as its due soon.

thanks!

Answer 1

HOMEWORKLIB POLICY requires us to solve first 4 parts. Please post the rest separately. Thank you.

Cost of reducing 2 pollution units for firm X=55+70=125

Cost of reducing 2 pollution units for firm Y=650+800=1450

Cost of reducing 2 pollution units for firm Z=90+125=215

Tradable permits

Price at which both X and Z will be willing to trade their permits-

Initially, each firm has 2 permits. So all need to reduce their permits by 2 units. If X and Z sell one permit each to Y, they both will need to reduce their pollution by 3 units now. The cost of reducing third unit for X is 110 and for Z is 180. So BOTH will agree to sell only when the price offered by Y is at least 180, because below that price it makes no sense for Z to sell since it will cost is 180 to reduce the third unit.

Since only options D and E (367 and 384) are higher than 180, they are the right choices.