Correcting for negative externalities problem. I need to put two check marks fro
ID: 2495498 • Letter: C
Question
Correcting for negative externalities problem.
I need to put two check marks from 4 choices. Please tell me which are right answers.
5. Correcting for negative externalities Regulation versus tradable permits Aa Aa Suppose the government wants to reduce the total pollution emitted by three firms in its area. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. The government wants to reduce total pollution in the area to 6 units. In order to do so, the government can choose between the following two methods Method 1: The government sets pollution standards Method 2: The government allocates tradable pollution permits Compare the two methods to determine the least-cost way of achieving the desired pollution quantity Eliminating pollution can be more difficult (and thus more costly) for some kinds of firms than for others. The following table shows the cost of eliminating each unit of pollution for each of the three firms Cost of eliminating the first unit of pollution Cost of eliminating the second unit of pollution Cost of eliminating the third unit of pollution Cost of eliminating the fourth unit of pollution Firm X $95 $120 $200 $1,400 Firm Y $80 $100 $150 $750 Firm Z $450 $800 $1,050 $6,300 Under method 1, the government sets pollution standards so that each firm must reduce its pollution by 2 units. Fill in the following table with the total cost to each firm of reducing its pollution by this amount. Firm X Firm Y Firm Z Total cost of eliminating 2 units of pollution $215 $180 $1,250 Adding up the costs to the three firms, you can see that the total cost of eliminating 6 units of pollution through regulatory standards is $1,645Explanation / Answer
1- Two permits have been issued
2- Cost of eliminating pollution for 3rd unit is 200, 150 and 1050 for X,Y and Z respectively.
So now 125 is eliminated as it is lower than cost incurred by the company X & Y that is 200 and 150.
Now again 325 is eliminated because it is lower than the cost could be incurred by Z but higher than the cost for X &Y. At this price both X &Ywill accept the deal but it is not likely that Z will offer.
Now 175 and 185 is marginally higher than the cost of Y and so it would accept that this price point.
However, it is lower than the cost of X so it would reject it.