Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. Refer to Scenario 2. What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? if firms are not allowed to buy and sell pollution permits from each other?

Exercise 1.23: Challenging Question. The Mondevil Corporation operates a chemical plant, which is located on the banks of the Sacramento river. Downstream from the chemical plant is a group of fisheries. The Mondevil plant emits by- products that pollute the river, causing harm to the fisheries. The profit Mondevil obtains from operating the chemical plant is $II > 0. The harm inflicted on the fisheries due to water pollution is equal to $L > 0 of lost profit [without pollution the fisheries' profit is $A, while with pollution it is $(A - L)]. Suppose that the fisheries collectively sue the Mondevil Corporation. It is easily verified in court that Mondevil's plant pollutes the river. However, the values of II and L cannot be verified by the court, although they are commonly known to the litigants. Suppose that the court requires the Mondevil attorney (player 1) and the fisheries' attorney (player 2) to play the following litigation game. Player 1 is asked to announce a number x≥0,…

Exercise 2.23-✰✰✰ Challenging Question ★★★. The Mondevil Corporation operates a chemical plant, which is located on the banks of the Sacramento river. Downstream from the chemical plant is a group of fisheries. The Mondevil plant emits by-products that pollute the river, causing harm to the fisheries. The profit Mondevil obtains from operating the chemical plant is $II > 0. The harm inflicted on the fisheries due to water pollution is equal to $L> 0 of lost profit [without pollution the fisheries' profit is $A, while with pollution it is $(A - L)]. Suppose that the fisheries collectively sue the Mondevil Corporation. It is easily verified in court that Mondevil's plant pollutes the river. However, the values of II and L cannot be verified by the court, although they are commonly known to the litigants. Suppose that the court requires the Mondevil attorney (Player 1) and the fisheries' attorney (Player 2) to play the following litigation game. Player 1 is asked to announce a number x >…

1. Suppose there are two firms that each emit 20 units of pollution, and the State Pollution Board wants to reduce this level to a total of 20 units between both firms. It will allocate 10 permits to each firm, and each permit will allow 1 unit of pollution per permit. Let R1 denote the pollution units abated (reduced) by firm 1 and R, denotes the pollution units abated by firm 2. The firms have the following marginal costs of pollution reduction: MCR;=2R; MCR;=4R2. And the following total costs of pollution reduction TCR; = R;? (equal to the quantity of pollution reduction, squared) TCR2 = 2R,? Note that since current pollution is 40 units, the policy will require R1 + R = 20. a. If each firm keeps its 10 permits, how much will they each spend in total to reduce emissions? (Hint: you can graph the MCR curves to find the areas for total cost. See figure 8.5 in textbook.) b. What is the cost-effective solution for the target of 20 units of total pollution abatement? c. If the firms…

The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2. Dollars 60 50 40 30 20- 10 0 Firm 1 MC₁ 1 1 Q₁ Q₂ Q₂ Q₁ Q₂ Q Q₁ Abatement Dollars A) each firm would abate to Q3. 60 50 40 30 20 10 FIGURE 17-5 0 B) each firm would abate to the same level. MC₂ 06) Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating 0 units of pollution. If the government imposed an emissions tax of $40 per unit of emissions, E) the level of pollution would be optimal. Firm 2 1 1 1 Q₁ Q₂ Q₂ Q Qs Q Q₁ Abatement C) Firm 1 would abate beyond Q3 and Firm 2 would abate less than Q3. D) Firm 2 would abate beyond Q3 and Firm 1 would abate less than Q3.

Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Marginal Cost to Eliminate Firm (Dollars) First Unit Second Unit Third Unit Fourth Unit 54 67 82 107 57 68 86 108 54 66 82 107 D 62 73 91 111 Refer to Table 10-5. Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8 pollution permits to achieve this goal. Which of the following is a likely auction price of the permits? S69 wered $85 swer $79 $87 ABC

6. Consider an industry with three firms. Firm 1's marginal cost of abatement (MCA)=10-E₁, where E is the tons of pollution emitted. Firm 2's MCA-30-2E₂. Firm 3's MCA-30-E3. Please draw a diagram to support your answers to the following questions. If there is no policy to reduce pollution, how much pollution will be emitted by each firm? What will be total pollution? Hint: if there is no policy to reduce pollution, the price to pollute is zero. b. If the government imposes a tax of $10/ton, how much pollution will be emitted by each firm? How much pollution will be emitted in total? C. What will be the total cost of abatement? a. d. If the government imposes a limit on pollution, where the limit is the total amount of pollution you found in part b, and each firm is allowed to pollute an equal amount (i.e., each firm will be allowed to emit one third of the total amount allowed), what will be the total cost of abatement? e. Which policy is more efficient, the tax or the limit on…

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8.1 Suppose we have an agricultural valley 100 km by 50 km, with a polluting electricity power plant. The power plant causes pollution problems in a narrow strip of land downwind of the plant, and within this valley. 10 km in length and 500 m in width, but no problems outside of that area. The total effect of the pollution is to make crop land less productive. If we were to clean up the pollution, would we expect land prices to increase? Where? Would we expect wages to decline? Would the changes in land prices and/or wages fully reflect the benefits of cleaning up the pollution? Why or why not?

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