The town of Steeleville has three steel factories, each of which produces air pollution. There are 10 citizens of Steeleville, each of whose marginal benefits from reducing air pollution is represented by the curve p(Q) = 5 - Q/10, where Q is the number of units of pollutants removed from the air. The reduction of pollution is a public good. For each of the three sources of air pollution, the following table lists the current amount of pollution being produced along with the constant marginal cost of reducing it.

a) On a graph, illustrate marginal benefits ("demand") and the marginal costs ("supply") of reducing pollution. What is the efficient amount of pollution reduction? Which factories should be the ones to reduce pollution, and what would the total costs of pollution reduction be? In a private market, would any units of this public good be provided?
b) The Steeleville City Council is currently considering the following policies for reducing pollution:
i. Requiring each factory to reduce pollution by 10 units
ii. Requiring each factory to produce only 30 units of pollution
iii. Requiring each factory to reduce pollution by one fourth
Calculate the total costs of pollution reduction associated with each policy. Compare the total costs and amount of pollution reduction to the efficient amount you found in part (a). Do any of these policies create a deadweight loss?
c) Another policy option would create pollution permits, to be allocated and, if desired, traded among the firms. If each factory is allocated tradeable permits allowing it to produce 30 units of pollution, which factories, if any, would trade them? (Assume zero transactions costs.) If they do trade, at what prices would the permits be traded?
d) How does your answer in part (c) relate to that in part (a)? Explain how the Coase Theorem factors into this relationship.

Transcribed Image Text:

Units of Pollution MC of Pollution So Currently Being Produced Reduction Factory A Factory B Factory C 20 40 60 S10 $20 $30