Extracted text: 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. Cost of Eliminating the... First Unit of Pollution Second Unit of Pollution Third Unit of Pollution (Dollars) (Dollars) Firm (Dollars) Firm X 60 80 120 Firm Y 500 675 1,100 Firm Z 75 100 160 Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units. Method 1: Regulation The first government employee suggests limiting 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. Total Cost of Eliminating Two Units of Pollution Firm (Dollars) Firm X 140 Firm Y 1,175 Firm z 175
Extracted text: Method 2: Tradable Permits Meanwhile, the other employee proposes using a different strategy to achieve the government's goal of reduding polution in the area from 12 units to 6 units. This employee suggests that the government issue two polution permits to each firm. For each permit a firm has in its passession, it can emit 1 unit of pollution. Firms are free to trade polution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, fierm 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 need to reduce its polution by only 1 unit while firm X would end up with only one permit and would have to reduce its polution by 3 units. Assume the negotiation and exchange of permits are costiess. Because firm Y has high polution-reduction costs, it thinks it might be better off buying a permit from firm X and a permit from firm 2 so that it doesn't have to reduce its own polution emissions. At which of the following prices are both firm X and firm 2 willing to sell one of their permits to firm Y? Check al that apply. O st14 O s138 O s144 O s279 O s636 Suppose the the government has set the trading price of a permit at $126 per permit. Complete the falowing table with the action each firm wil take at this permit price, the amount of polution cach firm will eliminate, and the amountie costs each firm to reduce polution to the necessary level. If a firm is wiling to buy two permits, assume that it buys one permit fram each of the ocher firms. (Hint: Do not include the prices paid far permits in the cost af reducing polution.) Initial Pollution Permit Final Amount of Pollution Cost of Pollution Allocation Eliminated Reduction Firm (Units of pollution) Action (Units of pollution ) (Dollars) Firm X Firm Y Firm z Regulation Versus Tradable Permits Determine the total cost of eliminating six units of pallution using both methods, and enter the amounts in the folowing tabie. (Hint: You might need to get information from previous tasks to complete ths table.) Total Cost of Eliminating Six Units of Pollution Proposed Method (Dollars) Regulation Tradable Permits In this case, you can conclude that eliminating polution is costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of polution.