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

Question

Suppose the government wants to reduce the total pollution written by three local firms. Currently, each firm it 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 feces different costs, so reducing pollution is more difficult for some firms then 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 at 4 units of pollution) is prohibitively expensive. Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units. The first government employee suppose to limit through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units. Complete the following table with the total cost to each sum of reducing its pollution by 2 units Meanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to 0 units He suggests that the government issues two pollution permits to each firm for each permit a firm it can emit 1 unit of pollution. Firms are free to trade pollution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, if Arm x agrees to sell a permit to firm Y at an agreed upon price, then firm Y would end up with three permits and would reed to reduce is pollution by only 1 unit while firm X would end up with only one permit and would have to reduce its pollution by 3 units Assume the reflation and exchange of permits ere costless.

Explanation / Answer

Ans: $367 and $384

Explanation: At prices $367 and $384 the firm X and Z is willing to sell one of its permits to Y, because Given that the cost of eliminating the third unit of pollution is $110 for firm X and $180 for Z, it will be willing to sell one of their permits at any price above $110 and $180 respectively.

Suppose the government has set the trading price of permit at $129, only X can sell one unit to Y.

Firm

Action

Final amount of pollution eliminated

Cost of pollution reduction($)

X

Sell one permit

1

235 (i.e. 55+70+110)

Y

Buy one permit

4

0

Z

Sell one permit

1

395 (i.e. 90+125+180)

Proposed method

Total cost of eliminationg six units of pollution($)

Regulation

1790(i.e. 125+1450+215)

Tradable permit

630(i.e.235+395)

In this case, you can conclude that eliminating polution is more costly to society whem the government regulates each firm to eliminate a certain amount of pollution

Firm

Action

Final amount of pollution eliminated

Cost of pollution reduction($)

X

Sell one permit

1

235 (i.e. 55+70+110)

Y

Buy one permit

4

0

Z

Sell one permit

1

395 (i.e. 90+125+180)

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