5. Correcting for negative externaities - Regutation versus tradable permits Suppole a municipality votes to reduce the combined pollution imroduced by three local companies. Presendy, each firm creates 4 units of pelikten in the acea, for a total of 12 polliution units. The oovernment can reduce total pollution in the area to 6 unis by choosing between the foilowing two methods: The costs faced by each firm are different, sa it is mote difficult for some firms to reduce pollution than others. The following tabie shows the cost faced by eoch firm to eliminate eoch unit of potution. Assume that the cost of eliminating all 4 units of polkution (that is, reducing pelivion to zero) is prohibively expenswe for all three firms. Hext, suppose that two government ofnclals proposed altemave plans that would reduce pollution by 6 units. Method it Regulation resuce its polution br? units Hethed 2 t Tradable Dermits negotiation and extrange of permis are costers. Because firm B has high polucien-feduction costs, it thinis it might be better off buying a permit from femt C and a permit frem firm A so thuk a firm 0 check al chat woply $124 Method z: Fradable Permits fim B) Check al that appir. 1124 1200 13,4 artsi: Regulation Versus Tradable Permits is get information from previcus casts to complete this table). In this case, rou can conclude that eliminating polbtisin is costly to society when the government regulates each firm to eliminute a certain amount of potutien than when a zilicates pollution permis thet can be bought and sold