. Correcting for negative externalities Regulation versus tradable permits Suppo
ID: 1123230 • Letter: #
Question
. Correcting for negative externalities Regulation versus tradable permits 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 od 12 polution units. f the gevernment wants to reduce total pollution in the area to 6 units, it can choose between the folloning t Available Methods to Reduce Pollution . The government sets pollution standards using regulation. 2. The government allocates tradable polilution permits Each fiem faces dafferent costs, so reducing minate each unit of pollution. For each firm, assume that the cest of reducing pollution to zero (that is, elininating all 4 units of pollution) Is prohibitively expensive pollutian is more difficuilt for some ms than others. The following table shows the cost each firm faces to Cost of Eliminating the of Pollution Second Unit of Polution Third Unit of Pollution (Dellars) (Dollars) (Dellars) 165 115 750 lires Firm X 90 Firms Now, imagre that two government employees propoot albernative-ans for reducin polution by 6 urits. Method 1: Regulation first government-ayee suggest to linit pauon through regdnon. Ten eet the plation poa· its pollution by 2 unts. oo ennert fedin, each to relate Complete the fedlowing table wth the btel cost te each e or seduoingts oolnie by 2 units.Explanation / Answer
Ans:
1) Computation of cost of elimination of two units of pollution by each firm(In dollars)
X = 130 + 165
= 295
Y = 90 + 115
= 205
z = 600+750
= 1350
2) The cost of elimination of 3rd unit of pollution for firm X is $220 and firm Y is $140. Hence if the permit price is above $140 firm Y will sell a permit and if the permit price is less than $220, firm X will not sell a permit for firm Z.The price at which firm Y will sell and firm X will not sell are $212 , $219
Following will apply - $212 , $219.
3) when the trading price is $218 per permit. Firm Y will sell a permit to firm Z and firm X will not sell at such price.
4) Total cost of eliminating six units of pollution
Regulation = $295 + $205 + $1350
= $1850
Tradable permits = $295 + $345 + $600
= $1240
5) Less
Eliminating pollution by regulation is more costly to society than the pollution permits.
Firm Initial Pollution Permit Allocation Action Final amount of pollution eliminated Cost of pollution reduction X 2 No action 2 units 130+165 = 295 Y 2 Sell one permit 3 units 90+115+140 = 345 Z 2 Buy one permit 1 unit 600Related Questions
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