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 Pollution1.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.FirmCost of Eliminating the...First Unit of PollutionSecond Unit of PollutionThird Unit of Pollution(Dollars)(Dollars)(Dollars)Firm X130165220Firm Y6007501,200Firm Z90115140 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.FirmTotal Cost of Eliminating Two Units of Pollution(Dollars)Firm X Firm Y Firm Z 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 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 pollution by only 1 unit while firm X 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 Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Z and a permit from firm X so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm Z willing to sell one of its permits to firm Y, but firm X is not? Check all that apply.$109 $142 $188 $238 $443 Suppose the the government has set the trading price of a permit at $355 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.)FirmInitial Pollution Permit AllocationActionFinal Amount of Pollution EliminatedCost of Pollution Reduction(Units of pollution)(Units of pollution)(Dollars)Firm X2 Firm Y2 Firm Z2 Regulation Versus Tradable PermitsDetermine 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 MethodTotal Cost of Eliminating Six Units of Pollution(Dollars)Regulation Tradable Permits In this case, you can conclude that eliminating pollution is costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution. Because firm Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Z and a permit from firm X so that itdoesn't have to reduce its own pollution emissions. At which of the following prices is firm Z willing to sell one of its permits to firm Y, but firm X isnot? Check all that apply.$109$142$188$238$443Suppose the the government has set the trading price of a permit at $355 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 itcosts 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 otherfirms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)Initial Pollution PermitFinal Amount of PollutionCost of PollutionAllocationEliminatedReductionFirm(Units of pollution)Action(Units of pollution)(Dollars)Firm2FirmYFirm2Regulation Versus Tradable PermitsDetermine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might needto get information from previous tasks to complete this table.)Total Cost of Eliminating Six Units of PollutionProposed Method(Dollars)RegulationTradable PermitsIn this case, you can conclude that eliminating pollution iscostly to society when the government distributes tradable permits than when itregulates each firm to eliminate a certain amount of pollution. Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in thearea, 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 twomethods:Available Methods to Reduce Pollution1. 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 toeliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) isprohibitively expensive.Cost of Eliminating the...First Unit of PollutionSecond Unit of PollutionThird Unit of PollutionFirm(Dollars)(Dollars)(Dollars)Firm X130165220Firm Y6007501,200Firm Z90115140Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units.Method 1: RegulationThe first government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each firm to reduceits 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 PollutionFirm(Dollars)Firm XFirm YFirm 2Method 2: Tradable PermitsMeanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to6 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 emit1 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 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 reduceits pollution by only 1 unit while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiationand exchange of permits are costless.

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 Pollution1.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.FirmCost of Eliminating the...First Unit of PollutionSecond Unit of PollutionThird Unit of Pollution(Dollars)(Dollars)(Dollars)Firm X130165220Firm Y6007501,200Firm Z90115140 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.FirmTotal Cost of Eliminating Two Units of Pollution(Dollars)Firm X Firm Y Firm Z  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 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 pollution by only 1 unit while firm X 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 Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Z and a permit from firm X so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm Z willing to sell one of its permits to firm Y, but firm X is not? Check all that apply.$109 $142 $188 $238 $443  Suppose the the government has set the trading price of a permit at $355 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.)FirmInitial Pollution Permit AllocationActionFinal Amount of Pollution EliminatedCost of Pollution Reduction(Units of pollution)(Units of pollution)(Dollars)Firm X2      Firm Y2      Firm Z2       Regulation Versus Tradable PermitsDetermine 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 MethodTotal Cost of Eliminating Six Units of Pollution(Dollars)Regulation Tradable Permits  In this case, you can conclude that eliminating pollution is    costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution. Because firm Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Z and a permit from firm X so that itdoesn't have to reduce its own pollution emissions. At which of the following prices is firm Z willing to sell one of its permits to firm Y, but firm X isnot? Check all that apply.$109$142$188$238$443Suppose the the government has set the trading price of a permit at $355 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 itcosts 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 otherfirms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)Initial Pollution PermitFinal Amount of PollutionCost of PollutionAllocationEliminatedReductionFirm(Units of pollution)Action(Units of pollution)(Dollars)Firm2FirmYFirm2Regulation Versus Tradable PermitsDetermine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might needto get information from previous tasks to complete this table.)Total Cost of Eliminating Six Units of PollutionProposed Method(Dollars)RegulationTradable PermitsIn this case, you can conclude that eliminating pollution iscostly to society when the government distributes tradable permits than when itregulates each firm to eliminate a certain amount of pollution. Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in thearea, 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 twomethods:Available Methods to Reduce Pollution1. 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 toeliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) isprohibitively expensive.Cost of Eliminating the...First Unit of PollutionSecond Unit of PollutionThird Unit of PollutionFirm(Dollars)(Dollars)(Dollars)Firm X130165220Firm Y6007501,200Firm Z90115140Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units.Method 1: RegulationThe first government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each firm to reduceits 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 PollutionFirm(Dollars)Firm XFirm YFirm 2Method 2: Tradable PermitsMeanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to6 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 emit1 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 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 reduceits pollution by only 1 unit while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiationand exchange of permits are costless.

Accepted Answer

The government has always tried to decrease pollution to decrease the social cost of a product. The…

	Available Methods to Reduce Pollution
1.	The government sets pollution standards using regulation.
2.	The government allocates tradable pollution permits.

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	600	750	1,200
Firm Z	90	115	140

Firm	Initial Pollution Permit Allocation	Action
(Units of pollution)	(Units of pollution)	(Dollars)
Firm X	2
Firm Y	2
Firm Z	2