Question

Suppose the government wants to reduce the total pollution emitted by three firms In Rs brea. 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 goverment 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. Firm Y $60 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 polution Firm X $75 $100 $160 $1,120 $80 $120 $600 Firm Z $500 $675 $1,100 $6,600 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 Adding up the costs to the three forms, you can see that the total cost of eliminating 6 units of pollution through regulatory standards is

Answer 1

Regulation method

	X	Y	Z
Total cost of elimination of 2 units	75+100 = 175	60+80 = 140	500+675 = 1175

Total cost of elimination of 6 units

= 175+140+1175

= $ 1490

.

permit system :

option B & C)

150 & 145

Only Y will sell a permit to Z, not X

So only when Price of permit lie between 120 & 160

bcoz if one permit is sold then cost is incurred for additional unit of abatement.

So X will sell it's permit if permit price is above 160

& Y will sell, only if permit price exceeds 120.

.

Permit price = 335

Firm	X	Y	Z
Initial allocation	2	2	2
Action	sell one permit	Sell one permit	buy 2 permits
Final pollution amount	1	1	4
Cost	75+100+160 = 335	60+80+120= 260	0

.

Total cost of elimination = 335+260 = 595

• eliminating pollution is less costly with pollution permits