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. Method 1: Regulation The first government employee suggests reducing 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.

Answer 1

To reduce pollution by 6 units using the method of regulation, each firm needs to reduce its pollution by 2 units. The total cost to each firm of reducing its pollution by 2 units is $20 for Firm A, $30 for Firm B, and $16 for Firm C.

Step-by-step explanation:

To reduce pollution by 6 units using the method of regulation, each firm needs to reduce its pollution by 2 units. Based on the given information, we can calculate the total cost to each firm of reducing pollution by 2 units. Let's assume that the cost of eliminating all 4 units of pollution is prohibitively expensive for all three firms. Therefore, we will determine the cost of reducing pollution by 2 units for each firm:

Firm Cost per unit of pollution reduction Total cost to reduce pollution by 2 units

Firm A $10 $20

Firm B $15 $30

Firm C $8 $16

Therefore, the total cost to each firm of reducing its pollution by 2 units is as follows:

• Firm A: $20
• Firm B: $30
• Firm C: $16