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 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) 60 500 75 Cost of Eliminating the... Second Unit of Pollution (Dollars) 80 675 100 Third Unit of Pollution Firm Firm X Firm Y Firm Z (Dollars) 120 1,100 160 Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units

Explanation / Answer

The following table shown below having total cost of eliminating 6 units pf pollution by 2 units Firm x y z Total cost of eliminating the first unit of pollution $           75 $           60 $           500 cost of eliminating the second unit of pollution $        100 $           80 $           675 Amount in $ $        175 $        140 $        1,175 $        1,490 In order for a firm to be willing to sell one of its permits the price it receives for the permit must outweight the cost of eliminating the unit of pollution the permit represents.The cost of eliminating the third unit of pollution is $120 for firm Y and $ 160 for firm X. Both firms will be willing to sell one of their permits at any price above is $ 160 Firm x y z Total Initial pollution permit allocation 2 units 2 units 2 units Trades Sell one permit Sell one permit Buy two permits Final Pollution amount 11 unit 11 unit 14 unit cost of reducing pollution to final amount $335 $260 $0 $595 The total cost of eliminating 6 units of pollution using a tradeble perit system is $ 595

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