5. Correcting for negative extemalities - Regulation versus tradablepermits Suppose a municipality votes to reduce the combined pollution introduced by three local companies. Presently, each firm creates 4 units of pollution in the area, for a total of 12 pollution units. The government can reduce total pollution in the area to 6 units by choosing between the following two methods: Methods to Reduce Pollution 1. The government imposes pollution standards using regulation. 2. The government issues tradable pollution permits. The costs faced by each firm are different, so it is more difficult for some firms to redoce pollution than others. The following table shows the cost faced by each firm to eliminate each unit of pollution. Assume that the cost of eliminating all 4 units of pollution (that is, reducing pollution to zero) is prohibitively expensive for all three firms. Next, suppose that two government offidals proposed alternative plans that would reduce pollution by 6 units. Method 1: Regulation The first govermment employee suggests reducing pollution through regulation. To meet the pollution goal, the government requires each firm to . reduce its pollution by 2 units. Complete the folliowing table with the total cost to each firm of reduang its pollution by 2 units. Method 2: Tradable Permits Meanwhile, the other employee proposes using a different strategy to achleve the govemment's goal of reducing pollution in the area from 12 units to 5 units. This emplovee suggests that the government lssue two pollution pemits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firmis 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 A agrees to sell a permit to firm B at an agreed upon price, then firm B would end up with three permits and would need to reduce its pollution by only 1 unit while firm A 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. Because firm C has high pollution-redudion costs, it thinks it might be belter off buying a permit from firm B and a permit from firm A so that it doesn' have to reduce its own pollution enissions. At which of the following prices is firm B willing to sell one of its permits to firm C, but firm A is not? Check all that apply. $123 $212 $219 $569 $595 Suppose the the government has set the trading price of a permit at $218 per permit. Complete the following table with the action each firm will take. at this permit price, the amount of pollution each firm will eliminate, and the amourt it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it bury one permit from each of the other firms. (Hint: Do not include the prices paid for pormits in the cost of reducing pollition.) Regulation Versus Tradable Permits Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.) In this case, you can conclude that eliminating polution is costly to sodiety when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold