Question

Pant A has $100 cost of reducing pollution and currently pollutes 100 units of carbon where as plant B has $50 cost of reducing pollution and currently pollutes 75 units of pollution. Consider two alternate policies: a command and control regulation that caps the amount of allowable pollution at 50 units for each plant and a cap and trade system that gives each plant 50 tradeable permits for pollution, How much extra does the command and control regulation cost?

Answer 1

Ans:

The extra cost of command and control regulation is $2500.

Analysis

Computation of cost under each alternative

Alternative-1 a command and control regulation

Plant A = 50 units * $100

= $5000

when 50 units of pollution is allowed , plant A currently pollutes 100 units of carbon, which should be reduced to 50 units and it costs $100 per unit for reducing pollution.Total cost for plant A is $5000.

Plant B = 25 units * $50

= $1250

when 50 units of pollution is allowed , plant B currently pollutes 75 units of carbon, which should be reduced to 50 units and it costs $50 per unit for reducing pollution.Total cost for plant B is $1250.

The command and control regulation cost = $5000 + $1250

= $6250

2) Tradable permits

Under tradable permits alternative plant B will sell tradable permits to plant A, since the cost of reducing pollution for plant B is less than plant A.Hence plant A will have 100 permits and does not reduce pollution.Plant B will not have any permits and it will reduce pollution of 75 units.

Plant A = 0

Plant B = 75 * $50

= $3750

Total cost under tradable permits option = $3750

3) The extra cost of command and control regulation = $6250 - $3750

= $2500