For the actions, the available options are (buy one permit, buy two permits, don't buy/sell, sell one permit, sell two permits).

Complete the following table with the action each rm will take at this permit price, the amount of pollution each rm will eliminate, and the amount it costs each rm to reduce pollution to the necessary level. If a rm purchases two permits, assume that it buys one permit from each of the other rms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution .) Initial Pollution Permit Allocation Final Amount of Pollution Eliminated Cost of Pollution Reduction Firm (Units of pollution) Action (Units of pollution) (Dollars) Firm X 2 V Firm Y 2 V Firm Z 2 V Regulation Versus 'l'radable 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.) Total Cost of Eliminating Six Units of Pollution Proposed Method (Dollars) Regulation Tradable Permits In this case, you can conclude that eliminating pollution is more V costly to society when the government regulates each rm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold. Method 2: 'h'adable 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. He suggests that the government issue two pollution permits to each rm. For each permit a rm 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 rms can agree on a price. For example, if rm X agrees to sell a permit to rm Y at an agreed-upon price, then rm Y would end up with three permits and would need to reduce its pollution by only 1 unit, while rm 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 rm Y has high pollution-reduction costs, it thinks it might be better off buying a permit from rm X and a permit from rm Z, so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both rm X and rm Z willing to sell one of their permits to rm Y? Check all that apply. 0 $102 Suppose the owners of the three rms get together and agree on a trading price of $182 per permit. Cost of Eliminating the . . . First Unit of Pollution Second Unit of Pollution Third Unit of Pollution Firm (Dollars) (Dollars) (Dollars) Firm X 80 100 150 Firm Y 450 800 1,050 Firm Z 95 120 200 Now, imagine that two government employees propose alternative plans for reducing pollution by 6 units. Method 1: Regulation The rst government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each rm to reduce its pollution by 2 units. Complete the following table with the total cost to each rm of reducing its pollution by 2 units. Total Cost of Eliminating TWo Units of Pollution Firm (Dollars) Firm X 180 Firm Y 1,250 FirmZ 215 7. Correcting for negative externalities- Regulation versus tradable permits 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