Question

5. Correcting for negative externalities - Regulation versus tradablepermits Suppose the government 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: Available Methods to Reduce Pollution 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.

Answer 1

Hi, I'll give you two methods

Step-by-step explanation:

Method 1: Regulation

In this method, the government sets a pollution standard that each firm must meet. If a firm fails to meet the standard, it may face fines or other penalties. The advantage of this method is that it can directly control the total level of pollution in the area. However, it may not be the most cost-effective solution for reducing pollution, as it does not take into account the different costs faced by each firm in reducing pollution.

Method 2: Tradable Pollution Permits

Under this method, the government allocates a certain number of tradable pollution permits to each firm. These permits allow a firm to emit a certain amount of pollution. If a firm wants to emit more pollution than it is allowed under its permits, it can purchase additional permits from other firms that have not used all of their permits. This creates a market for pollution permits, and the price of the permits reflects the cost of reducing pollution.