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5. Correcting for negative externalities - Regulation versus tradablepermits Suppose a mumcipality 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 followifig 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 foced 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 firmis. Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units. Method 1: Requlation 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 toral cost to each firm of reducing its pollution by 2 units Method 7: Iradable Permits Meariwhile, the otfier employee proposes using a different strategy to achleve the government's goal of reducing polluton in the area from 12 units to 6'units. This employee suggests that the govemment issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 uniq of pollotion. 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 aprees to sell a permit to firm 5 at an agreed-apon geice, then firm B would end up with three permats and would need to reduce is pollution by only I unik while firm A would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotabon and exchange of permuts are costess. Because firm C has high pollution-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 all that apply. Suppose the the government has set the trading price of a permit at $218 per permit. Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it custs each firm to reduce pollution to the necessary level If a firm is willing to buy two permits, assume that it buys ane permit from each of the athav firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.) Regulation Versus Tradable Permits Determine the total cost of eliminating sor 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 thes table.) In this case, you can conclude that eliminating pollution is costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it -allocates poltution permits that can be bought and sold