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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.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Proposed Method Regulation Action Sell one permit Buy two permits Sell one permit Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) Total Cost of Eliminating Six Units of Pollution (Dollars) 1,430 775 000 3 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.) 3 Cost of Pollution Reduction (Dollars) 415 0 360 In this case, you can conclude that eliminating pollution is more costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.

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.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Proposed Method Regulation Action Sell one permit Buy two permits Sell one permit Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) Total Cost of Eliminating Six Units of Pollution (Dollars) 1,430 775 000 3 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.) 3 Cost of Pollution Reduction (Dollars) 415 0 360 In this case, you can conclude that eliminating pollution is more costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.

Principles of Microeconomics
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter10: Externalities
Section: Chapter Questions
Problem 10PA
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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 Firm A Firm B Firm C First Unit of Pollution (Dollars) 130 600 90 Cost of Eliminating the... Second Unit of Pollution (Dollars) 165 750 115 Third Unit of Pollution (Dollars) 220 1,200 140
Transcribed Image Text: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 Firm A Firm B Firm C First Unit of Pollution (Dollars) 130 600 90 Cost of Eliminating the... Second Unit of Pollution (Dollars) 165 750 115 Third Unit of Pollution (Dollars) 220 1,200 140
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.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Proposed Method Regulation Action Tradable Permits Sell one permit Buy two permits Sell one permit 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.) Final Amount of Pollution Eliminated (Units of pollution) 3 0 3 Total Cost of Eliminating Six Units of Pollution (Dollars) 1,430 775 Cost of Pollution Reduction (Dollars) 415 0 360 In this case, you can conclude that eliminating pollution is more costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.
Transcribed Image Text: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.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Proposed Method Regulation Action Tradable Permits Sell one permit Buy two permits Sell one permit 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.) Final Amount of Pollution Eliminated (Units of pollution) 3 0 3 Total Cost of Eliminating Six Units of Pollution (Dollars) 1,430 775 Cost of Pollution Reduction (Dollars) 415 0 360 In this case, you can conclude that eliminating pollution is more costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.
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