5. Correcting for negative externalities - Regulation versus tradablepermits Suppose a municipality votes to reduce the combined pollution Introduced by three local companles. 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: 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 ellminate each unit of pollution. Assume that the cost of ellminating all 4 units of pollution (that is, reducing pollution to zero) is prohlbitively expensive for all three firms. Next, suppose that two government offlilals 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 whth 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 achleve 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 possesslon, 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 negotlation and exchange of permits are costless. Because firm C has high poliution-reduction costs, it thinks it might be better off buying a permit from firm B and a permit from firm A so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm B willing to sell one of its permits to firm C, but firm A is not? Check an that apply $104 $170 $183 $263 $734 Suppose the the government has set the trading price of a permit at $585 per permit. Complete the following table wth the action each firm will take at this permit price, the amount of pollution each flim will ellminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is wiling to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing poifution.) Regulation Versus Tradable Permits 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 soclety when the govermment regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold