Suppose a municipality votes to reduce the combined pollution introduced by three local companies. Presently, each firm creates 4 units of pollution in the area, for a total of 12 pollution units. The government can reduce total pollution in the area to 6 units by choosing between the following two methods:
Methods to Reduce Pollution
1. The government imposes pollution standards using regulation.
2. The government issues tradable pollution permits.
The costs faced by each firm are different, so it is more difficult for some firms to reduce pollution than others. The following table shows the cost faced by each firm to eliminate each unit of pollution. Assume that the cost of eliminating all 4 units of pollution (that is, reducing pollution to zero) is prohibitively expensive for all three firms.
Firm
Cost of Eliminating the...
First Unit of Pollution
Second Unit of Pollution
Third Unit of Pollution
(Dollars)
(Dollars)
(Dollars)
Firm A 60 80 120
Firm B 500 675 1,100
Firm C 75 100 160
Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units.
Method 1: Regulation
The first government employee suggests reducing pollution 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 firm of reducing its pollution by 2 units.
Firm
Total Cost of Eliminating Two Units of Pollution
(Dollars)
Firm A
140
Firm B
725
Firm C
175
Method 2: Tradable Permits
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 6 units. This employee suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, 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 firm A agrees to sell a permit to firm B at an agreed-upon price, then firm B would end up with three permits and would need to reduce its pollution by only 1 unit while firm A would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.
Because firm B has high pollution-reduction costs, it thinks it might be better off buying a permit from firm A and a permit from firm C so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm A willing to sell one of its permits to firm B, but firm C is not? Check all that apply.

$93
$127
$158
$444
$662
Suppose the the government has set the trading price of a permit at $474 per permit.
Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)
Firm
Initial Pollution Permit Allocation
Action
Final Amount of Pollution Eliminated
Cost of Pollution Reduction
(Units of pollution)
(Units of pollution)
(Dollars)
Firm A 2 Sell one permit
1
Firm B 2 Buy one permit
0
0
Firm C 2 Don't buy/sell
2
175
Regulation Versus Tradable Permits
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.)
Proposed Method
Total Cost of Eliminating Six Units of Pollution
(Dollars)
Regulation
1,040
Tradable Permits
In this case, you can conclude that eliminating pollution ismore costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

Question

gverdell gverdell

30-04-2024
Mathematics

Answered

Suppose a municipality votes to reduce the combined pollution introduced by three local companies. Presently, each firm creates 4 units of pollution in the area, for a total of 12 pollution units. The government can reduce total pollution in the area to 6 units by choosing between the following two methods:
Methods to Reduce Pollution
1. The government imposes pollution standards using regulation.
2. The government issues tradable pollution permits.
The costs faced by each firm are different, so it is more difficult for some firms to reduce pollution than others. The following table shows the cost faced by each firm to eliminate each unit of pollution. Assume that the cost of eliminating all 4 units of pollution (that is, reducing pollution to zero) is prohibitively expensive for all three firms.
Firm
Cost of Eliminating the...
First Unit of Pollution
Second Unit of Pollution
Third Unit of Pollution
(Dollars)
(Dollars)
(Dollars)
Firm A 60 80 120
Firm B 500 675 1,100
Firm C 75 100 160
Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units.
Method 1: Regulation
The first government employee suggests reducing pollution 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 firm of reducing its pollution by 2 units.
Firm
Total Cost of Eliminating Two Units of Pollution
(Dollars)
Firm A
140
Firm B
725
Firm C
175
Method 2: Tradable Permits
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 6 units. This employee suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, 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 firm A agrees to sell a permit to firm B at an agreed-upon price, then firm B would end up with three permits and would need to reduce its pollution by only 1 unit while firm A would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.
Because firm B has high pollution-reduction costs, it thinks it might be better off buying a permit from firm A and a permit from firm C so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm A willing to sell one of its permits to firm B, but firm C is not? Check all that apply.

$93
$127
$158
$444
$662
Suppose the the government has set the trading price of a permit at $474 per permit.
Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)
Firm
Initial Pollution Permit Allocation
Action
Final Amount of Pollution Eliminated
Cost of Pollution Reduction
(Units of pollution)
(Units of pollution)
(Dollars)
Firm A 2 Sell one permit
1
Firm B 2 Buy one permit
0
0
Firm C 2 Don't buy/sell
2
175
Regulation Versus Tradable Permits
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.)
Proposed Method
Total Cost of Eliminating Six Units of Pollution
(Dollars)
Regulation
1,040
Tradable Permits
In this case, you can conclude that eliminating pollution ismore costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

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