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. Firm Firm X Firm Y Firm Z First Unit of Pollution (Dollars) 90 55 650 Method 1: Regulation Cost of Eliminating the... Second Unit of Pollution Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units. Firm Firm X Firm Y Firm Z (Dollars) 125 70 800 Third Unit of Pollution (Dollars) 180 110 1,500 The first government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units. Method 2: Tradable Permits Complete the following table with the total cost to each firm of reducing its pollution by 2 units. Total Cost of Eliminating Two Units of Pollution (Dollars) 215 125 1,450 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. This employee suggests that the government issue two pollution permits to each firm. For each permit a firm 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 firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only unit while firm 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.

See below for three parts of Scenario 2 Scenario  2A. There are three firms, A;B; and C that produce electricity. The first two firms have the same per-megawatt cost of production equal to $2, while firm C has a per-megawatt cost of $1. The firms differ, however, in their pollution. Firms A;B; and C produce respectively 1, 2, and 3 cubic feet of carbon monoxide per megawatt produced. A cubic foot of carbon monoxide pollutes the environment, and has a social cost of $2.5. The demand for electricity is represented by the inverse demand function P (Mw) =100 - Mw, where Mw represents the megawatts consumed by the public. Suppose firms are not held accountable for the pollution they produce. Scenario 2B. Suppose now that the government can measure the amount of pollution issued by each firm, and suppose that the government constrains each firm to emit no more than 9 cubic feet of carbon monoxide. Scenario 2C Suppose that government allows firms to trade their permits to emit carbon…

Consider a market with the following supply and demand.  (It may help to draw a graph for these questions.) P            5            6            7            8            9            10            11            12           13           14 QS        200       300        400       500        600        700         800          900        1000       1100 QD       800       750        700       650        600        550         500          450         400         350 If there is an external cost of $3, what is the efficient quantity? If there is an external benefit of $3, what is the efficient quantity? For the remaining questions assume that there is a $3 external COST. If the government wants to get the efficient quantity with a per/unit tax, how much should the tax be? Now imagine that they use tradable allowances.  If they cap the quantity at 400 what would the value of these allowance be in the market?  (Assume the market is perfectly competitive and that "one allowance" lets you…

Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, are accustomed to each having 6 parties a month. Phi Kappa Sigma and Phi Kappa Tau are located close to each other on Bogue Street. These parties impose a negative externality on their other neighbors on Bogue Street. Suppose President Stanley decides that the socially optimal total number of parties on Bogue Street is 8 parties a month. The total benefits each fraternity derives from having a certain number of parties a month are given in the table below. Number of Parties 0 1 2 3 4 5 6 Phi Kappa Sigma's Total Benefits 0 300 500 650 700 740 775 Phi Kappa Sigma's Marg. Benefits Phi Kappa Tau's Total Benefits 0 250 475 650 750 825 850 Phi Kappa Tau's Marg. Benefits a) Suppose President Stanley decides to limit the total number of parties to 8 by issuing Phi Kappa Sigma 6 rights and Phi Kappa Tau 2 rights. Each right allows the fraternity to have one party. If these rights are allowed to be traded, how many rights will be sold? Who…

What is an externality in economics? Explain how a neighbor’s barking dog could be both a positive and a negative externality.   Can pollution ever make us better off? How do we know? Should we aim to eliminate all pollution? If not, what should our goal be? Defend your answer.   When thinking about types of goods, what does rivalry mean? What does excludability mean? What are the four categories of goods we can identify using those attributes, and what is an example of a good in each category?