Attempts: Average: 15 Suppose the govenment wants to reduce the total pollution
ID: 1109791 • Letter: A
Question
Attempts: Average: 15 Suppose the govenment 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: 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.. Third Unit of Pollution (Dollars) Second Unit of Pollution (Dollars) 100 800 120 First Unit of Pollution (Dollars) Firm X Firm Y Firm Z 150 1,050 200 450 95Explanation / Answer
Ans:
1) Cost of eliminating two units of pollution(in dollars)
Firm X = 80 + 100
= 180
Firm Y = 450+800
= 1250
Firm Z = 95+120
= 215
2) In case of tradable permits firm X and firm Z will agree to trade at prices of $410 and $708
In this case firm X and firm Z would incur $150 and $200 in order to reduce 3rd unit of pollution.Hence If firm Y pays any thing more than $200 it will be advantages for both firms to trade.
3) when government trading price is $182 only firm X will agree to trade.
Table
4) Total cost of eliminating six units of pollution
Regulation = $180 + $1250 + $215
= $1645
Tradable permits = $330 + $450 + $215
= $995
5) More
Government regulation is more costly for the society to eliminate pollution as compared to tradable permits.
Firm Initial pollution permit allocation Action final amount of pollution emited Cost of pollution reduction X 2 sell 1 permit 1 unit $330 Y 2 buy 1 permit 3 units $450 Z 2 no action 2 units $215Related Questions
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