Pant A has $100 cost of reducing pollution and currently pollutes 100 units of carbon where as plant B has $50 cost of reducing pollution and currently pollutes 75 units of pollution. Consider two alternate policies: a command and control regulation that caps the amount of allowable pollution at 50 units for each plant and a cap and trade system that gives each plant 50 tradeable permits for pollution, How much extra does the command and control regulation cost?
Ans:
The extra cost of command and control regulation is $2500.
Analysis
Computation of cost under each alternative
Alternative-1 a command and control regulation
Plant A = 50 units * $100
= $5000
when 50 units of pollution is allowed , plant A currently pollutes 100 units of carbon, which should be reduced to 50 units and it costs $100 per unit for reducing pollution.Total cost for plant A is $5000.
Plant B = 25 units * $50
= $1250
when 50 units of pollution is allowed , plant B currently pollutes 75 units of carbon, which should be reduced to 50 units and it costs $50 per unit for reducing pollution.Total cost for plant B is $1250.
The command and control regulation cost = $5000 + $1250
= $6250
2) Tradable permits
Under tradable permits alternative plant B will sell tradable permits to plant A, since the cost of reducing pollution for plant B is less than plant A.Hence plant A will have 100 permits and does not reduce pollution.Plant B will not have any permits and it will reduce pollution of 75 units.
Plant A = 0
Plant B = 75 * $50
= $3750
Total cost under tradable permits option = $3750
3) The extra cost of command and control regulation = $6250 - $3750
= $2500
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