Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter10: Externalities
Section: Chapter Questions
Problem 5PA
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Question
5. Correcting for negative externalities - Regulation versus tradable permits
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.
Firm
|
Cost of Eliminating the...
|
||
---|---|---|---|
First Unit of Pollution
|
Second Unit of Pollution
|
Third Unit of Pollution
|
|
(Dollars)
|
(Dollars)
|
(Dollars)
|
|
Firm X | 130 | 165 | 220 |
Firm Y | 90 | 115 | 140 |
Firm Z | 600 | 750 | 1,200 |
Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units (the tables and the rest of the homework question is the screenshot below)
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