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. It 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 Firm (Dollars) (Dollars) (Dollars) Firm X 90 125 180 Firm Y 55 70 110 Firm z 650 800 1,500 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 Firm Y Firm z
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 possession, 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, firm 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 poliution by anly 1 unit while firm X would end up with only ane permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costiess. Because firm 2 has high polution reduction costs, it thinks k might be better off buying a permit from firm Y and a permit from firm x so that it doesn't have to reduce its own polution emissions. At which of the following prices are both firm Y and firm X willing to sell ane of their permits to firm 27 Check al that aply. O st09 O s149 O st70 O $579 O s787 Suppose the the government has set the trading price of a permit at $498 per permit. Complete the fallowing table with the action each frm wil take at ehis permit price, the amount of polution each firm will eliminate, and the amount e 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 cach of the ocher fiems. (Hint: Do not include the prices paid for permits in the cost of reducing polucion.) Initial Pollution Permit Final Amount of Pollution Cost of Pollution Allocation Eliminated Reduction (Units of pollution) (Units of pollution) Firm Action (Dollars) Firm X Firm Y Firm 2 Regulation Versus Tradable Permits Determine the total cost of eliminating six units of pallution using both methods, and enter the amounts in the folowing table. (Hint: You might need to get information from previous tasks to camplete this table.) Total Cost of Eliminating Six Units of Pollution Proposed Method (Dollars) Regulation Tradable Permks In this case, you can conclude that eliminating polution is v costly to society when the government regulates each firm to eliminate a certain amount of polution than when it allocates polution permits that can be bought and sold.