Question

Correcting for negative externalities - Regulation versus tradablepermits 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. Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units. Complete the following table with the total cost to each firm of reducing its pollution by 2 units. 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 A agrees to sell a permit to firm B at an agreed-upon price, then firm B would end up with three permits and would need to reduce its pollution by only 1 unit while firm A 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 B has high pollution-reduction costs, it thinks it might be better off buying a permit from firm A and a permit from firm C so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm A willing to sell one of its permits to firm B, but firm C is not? Check all that apply. $93 $127 $158 $444 $662 Suppose the the government has set the trading price of a permit at $474 per permit. Complete the following table with the action each firm will take at this permit price, the amount of poilution 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 pald for permits in the cost of reducing pollution.) 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.) In this case, you can conclude that eliminating pollution is 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.

Answer 1

The economics of reducing pollution through regulation and tradable permits involve finding the most cost-effective path for firms with varying costs of emission reduction, leveraging market dynamics to achieve overall pollution reduction.

Step-by-step explanation:

The question relates to the economic concept of correcting for negative externalities, specifically through regulation and tradable pollution permits (marketable permits). The core idea being discussed is how to reduce pollution in a cost-effective manner. Tradable permits, or a cap-and-trade system, allow firms with lower costs of reducing pollution to do so, while those with higher costs have the option to buy permits. This creates a flexible and cost-efficient way for society to reduce pollution. The market dynamics of this system ensure that the total quantity of pollution declines, but the individual reductions are determined by the firms' willingness to trade based on their respective costs of reducing emissions.

Answer 2

The economic implications of addressing pollution through regulation versus tradable permits involve the allocation of pollution reduction tasks in a way that is most cost-effective, with tradable permits allowing for cost-efficient reductions.

Step-by-step explanation:

The question involves understanding the economic implications of two methods to reduce negative externalities caused by pollution: direct regulation and the implementation of a system of tradable permits (also known as cap-and-trade). The essence of the tradable permits system is that it allows firms with lower costs of reducing pollution to do so and sell their excess permits to firms for whom reducing pollution is more costly. This market mechanism ensures that pollution reduction overall is achieved in the most cost-effective manner.

In the scenario provided, the total quantity of pollution must decline from 12 units to 6 units. Under the tradable permits system, firms that can reduce pollution at a lower cost will do so and potentially sell permits to higher-cost firms. This allows for a more efficient allocation of resources and leads to a lower total cost to reduce pollution overall, unlike a blanket regulation approach, which may not account for the differing costs among firms.