Suppose a municipality votes to reduce the combined pollution introduced by three local companies. Presently, each firm creates 4 units of pollution inthe area, for a total of 12 pollution units. The government can reduce total pollution in the area to 6 units by choosing between the following twomethods:Methods to Reduce Pollution1. The government imposes pollution standards using regulation.2. The government issues tradable pollution permits.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 costfaced 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) isprohibitively expensive for all three firms.FirmFirm AFirm BFirm CFirst Unit of Pollution(Dollars)8055075Cost of Eliminating the...Second Unit of Pollution Third Unit of Pollution(Dollars)2101,075130(Dollars)13070090Next, suppose that two government officials proposed alternative plans that would reduce pollution by 6 units. Method 2: Tradable PermitsMeanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to6 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 emit1 unit of pollution. 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 agrees to sell a permit to firm B at an agreed-upon price, then firm B would end up with three permits and would need toreduce its pollution by only 1 unit while firm A would end up with only one permit and would have to reduce its pollution by 3 units. Assume thenegotiation and exchange of permits are costless.Because firm B has high pollution-reduction costs, it thinks it might be better off buying a permit from firm C and a permit from firm A so that itdoesn't have to reduce its own pollution emissions. At which of the following prices are both firm C and firm A willing to sell one of their permits tofirm B? Check all that apply.$124$166O $200$364O $475FirmFirm AFirm BFirm CSuppose the the government has set the trading price of a permit at $147 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 itcosts 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 theother firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)Initial Pollution PermitAllocation(Units of pollution)222ActionFinal Amount of PollutionEliminated(Units of pollution)Cost of PollutionReduction(Dollars)

An abatement cost is a cost borne by firms when they are required to remove and/or reduce negative…

Because firm B has high pollution-reduction costs, it thinks it might be better off buying a permit from firm C and a permit from firm A so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm C and firm A willing to sell one of their permits to firm B? Check all that apply. ооооо $124 $166 $200 $364 O $475

Because firm B has high pollution-reduction costs, it thinks it might be better off buying a permit from firm C and a permit from firm A so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm C and firm A willing to sell one of their permits to firm B? Check all that apply. ооооо $124 $166 $200 $364 O $475

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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