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:

1. To set pollution standards using regulation
2. To allocate tradable pollution permits

Suppose the government wants to reduce the total pollution emitted by three local rms. Currently, each rm 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: 1. To set pollution standards using regulation 2. To allocate tradable pollution permits Each rm faces different costs, so reducing pollution is more difcult for some rms than others. The following table shows the cost each rm faces to eliminate each unit of pollution. For each rm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive. Cost of Eliminating the . . . First Unit of Pollution Second Unit of Pollution Third Unit of Pollution Firm (Dollars) (Dollars) (Dollars) Firm X 130 165 220 Firm Y 90 115 140 Firm Z 600 750 1,200 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. Compute the total cost to each rm in reducing its pollution by 2 units. Firm X Firm Y Firm 2