ECON 2J03 Lecture Notes - Lecture 13: Atep Rizal, Kenneth Arrow

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14 Mar 2017

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Transferable emissions permits create a form of property right. The right is to emit a certain amount of pollution. These permits are transferable: can be bought and sold, the price at which they are bought and sold is determined by the buyer and seller. Like a tax, transferable permits that are traded in a competitive market are a cost- effective policy. Regulators do not have to know each polluters mac curve to achieve cost- effectiveness. Once the target level of pollution is set, the market will reveal a polluters mac curve through the price they pay for the permits. Trading occurs if the macs of polluters are sufficiently different: some will become sellers of permits and others buyers. The exchange of permits provides each trader with cost savings. Firms will buy a permit if the cost of the permit is less than their cost to abate the same unit.

Related Questions

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

ECON 2J03 Lecture Notes - Lecture 13: Atep Rizal, Kenneth Arrow

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