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28 Oct 2020

9. Tradable pollution permits

a. are cost-effective in achieving a targeted level of emission reduction in an industry, and they provide incentives for innovation of improved methods of abating pollution.

b. are cost-effective in achieving a targeted level of emission reduction in an industry, but they provide no incentives for innovation of improved methods of abating pollution.

c. are not cost-effective in achieving a targeted level of emission reduction in an industry, but they provide incentives for innovation of improved methods of abating pollution.

d. are not cost-effective in achieving a targeted level of emission reduction in an industry, and they do not provide incentives for innovation of abating pollution.

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Consider the problem of carbon dioxide emissions. We will abstract from the complexity of the problem slightly, assuming there are polluters and consumers in two regions, the OECD (O) and the rest of the world (R). Suppose the marginal cost of controlling CO₂ emissions is $13 per ton. Let the marginal willingness to pay for pollution reduction be 14 - Q for region O and 8 - 2Q for region R, where Q is the amount of pollution reduction.

The United Nations is considering two proposed methods for controlling CO2 emissions, both involving polluters paying for the damage they cause:

Proposal A involves the polluters paying damages to each region for the pollution generated.

Proposal B involves the polluters in each region independently negotiating pollution reductions with the consumers of their respective region, assuming the other region is not undertaking pollution reduction.

What is the socially efficient level of emissions reduction Q*? A graph of the marginal abatement cost and the total marginal willingness-to-pay curves would be helpful. (Hint: CO2 emission reduction is a global public good)

How much total pollution reduction will occur under Proposal A and what will be the total compensation received by regions O and R? If those payments were instead placed in the general coffers of the UN, would the outcome be any different from an efficient point of view? Why or why not?

How much pollution would be generated under Proposal B? Explain any differences between this answer and the answer to parts (a) and (b).

pinkarmadillo937

1. Suppose marginal cost of abating X units of pollution is given by: MC(X) = 2X and marginal benefits are MB(X) = 16-2x when X<= 3 and 10 when X > 3. Current pollution = 6.

a.) What is the optimal level of pollution abatement, X*? How much pollution is there when X = X*?

COMMENT: For this part I set 2x = 16-2x and got 4 but 4>3 so I don't think that's a valid solution. So I set 2x = 10 when X >3 and got 5, what's the correct approach?

b.) What are total costs, marginal costs, and total net benefits at X = X*?

c.) What is the total net benefit of making (and encofring) a rule that bans pollution completely? What is the marginal benefit from removing the last little bit of pollution (i.e. the marginal benefit around the point X = Xmax)

d.) Suppose air pollution abatement in the U.S. is currently X* (that is, we currently have the ideal amount of air pollution given the costs and benefits of abatement). Now suppose that an effective vaccine against asthma is invented and given to everyone. Would this increase or decrease X*? Come up with your own example of a new technology that would move X* in the opposite direction and explain why it would have this effect.

Poster below me asked for irrelevant information that is not needed to answer the question.

8. Two methods of reducing pollution

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,it can choose between the following two methods:


1.	The government sets pollution standards (Method 1)
2.	The government allocates tradable pollution permits. (Method 2)

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 elimanating each unit of pollution for each of the three firms.


	Firm X	Firm y	Firm z

Cost of elimination the first unit of pollution	$650	$55	$90
Cost of elimination the 2nd unit of pollution	$800	$70	$125
Cost of elimination the 3rd unit of pollution	$1,500	$110	$180
Cost of elimination the 4th unit of pollution	$10,500	$550	$1080

Under Method 1, the government sets pollution standards so that each firm must reduce its polluton by 2 units. Fill in the following table with the total cost to each firm of reducing its pollution by this amount

Total cost of eliminating 2 units of pollution	FIRM X	FIRM Y	FIRM Z

Adding up the costs to the three firms, you can see that the total cost of eliminating 6 units of pollution through regulatory standard is _________
$1645
$1790
$2,785
$1,490
Now suppose the government uses method 2 to reduce pollution in the area from 12 units to 6 units by issuing two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution, but firms are also free to trade pollution permits with one another. For example, if firm X were to buy a permit form firm Y, firm X would end up with three permits and would need to reduce its pollution by only1 unit, whereas firmY 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 of its high pollution-reduction costs, firm X might be better off buying permits form firm Y and firm Z so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm y and firmz willing to sell one of their permits to firm X? check all that apply

- $390
-$155
-$415
-$70
Again , suppose that you are considering the method of pollution reduction involving trabable permits. Suppose the owners of the three firms get together and agree on a trading price of $420 per permit. Fill in the following table with the action taken by each firm, the amount each firm will pollute, and the amount it costs each firm to reduce pollution to the necessary level. (Hint: do not include the prices of permits in the cost of reducing pollution)

	FIRM X	FIRM Y	FIRM Z
Initial pollution permit allocation	2 units	2 units	2 ;units
action
Final pollution amount

Given this senario, rthe total cost of eliminating 6 units of pollution using a tradable permit is _______
$0
$1,470
$1,100
$630
On the basis of this example, you can conclude that eliminating pollution is ________ costly to society when
more
less
the government allocates pollution permits that can be bought and sold than when it directs each firm to eliminate a certain amount of pollution.

Blank under method one

FIRM X	FIRM Y	FIRM Z
	$800	$125	$305
choose the right answer	$2,300	$70	$215
	$2,150	$165	$125
	$1450	$180	$270

Blanks under tradable permits

	FIRM X	FIRM Y	FIRM Z
Initial pollution permit allocation	2 units	2 units	2 ;units
action	buy 1 permit sell 2 permit don't buy/sell sell 1 permit buy 2 permit	buy 1 permit sell 2 permit don't buy/sell sell 1 permit buy 2 permit	buy 1 permit sell 2 permit don't buy/sell sell 1 permit buy 2 permit
Final pollution amount	1 unit 2 units 3 units 4 units	1 unit 2 units 3 units 4 units	1 unit 2 units 3 units 4 units
Cost of polluton reduction	$650 $0 $1,450 $800	$0 $70 $125 $235	$125 $215 $395 $0

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