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: Avallable Methods to Reduce Pollution 1. The government sets pollution standards using regulation. 2. The govemment allocates tradable pollution permits. Each firm faces different costs, so reducing pollution is more diffcult for some firns 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 prohicitively expensive. Naw, imagine that two govemment employees proposed atemative ptans foe reducing pollution by 6 units. The first government employee suggests limiting 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. Method 2: Tradable Permits Meanwhile, the other emplovee proposes using a different strategy to achleve the government's goal of reducing poliution 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 poltution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, If firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit while firm X would end Lp with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation. and exchange of permits are costiess. Because firm Z has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Y and a permit from firm X so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm Y and firm X wililing to sell one of their permits to firm 2? Check all that apply. 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 poliution permits with one another (that is, bey and sell them) as long as both firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its poliution by only 1 unit while firm X 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 Z has high pollution-reduction costs, it thiniss it might be better off buying a permit from firm Y and a permit from firm X so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm Y and firm X willing to sell one of their permits to firm 27 Check all that apply. 5103 $135 $146 $290 $553 Suppose the the government has set the trading price of a permit at $136 per permit. Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm wid eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a flrm is wiling 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 poilution.) 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 firm5. (Hint: Do not indude the prices paid for permits in the cost of reducing pollution.) Regulation Versus Tradable Permits Determine the total cost of eliminating six units of poiliution 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 potution is costy to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution