Suppose the government wants to reduce the total pollution emitted by three loca

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:

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.

Complete the following table with the total cost to each firm of reducing its pollution by 2 units.

Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.)

In this case, you can conclude that eliminating pollution is (More/ Less)costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.

Available Methods to Reduce Pollution 1. The government sets pollution standards using command-and-control regulation. 2. The government allocates tradable pollution permits. Firm Firm X Firm Y Firm Z First Unit of Pollution (Dollars) 95 450 80 Cost of Eliminating the. . . Second Unit of Pollution (Dollars) 120 800 100 Third Unit of Pollution Dollars) 200 1,050 150

Explanation / Answer

Ans:

1) Computation of total cost of eliminating two units of pollution

X = 95+120

= 215   

Y = 450+800

   = 1250

Z = 80+100

   = 180

2) At a price of $178 and $186, Firm Z will sell a permit to Y and Firm X will not sell at this price.

Since the cost of elimination of 3rd unit of pollution for Firm Z is $150 and for Firm X is $200, Hence if the price above $150 and below $200 only Firm Z will be ready to sell a permit to Firm Y.

3) When the permit price is $326

When the permit price is $326 firm X and firm Z will sell each unit to firm Y

Table

4) Total cost of eliminating six units of pollution

Regulation = $215 + $1250 + $180

   = $1645

Tradable permits = $415 + $330

= $745

5) More

Eliminating pollution through regulation is more costly to society than pollution permits.

Firm Initial pollution permit allocation Action Final amount of pollution eliminated Cost of pollution reduction X 2 Sell one permit 3 units $415 Y 2 Buy two permits 0 units 0 Z 2 Sell one permit 3 units $330

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