ECO 2023 Lecture Notes - Lecture 10: Coase Theorem, Economic Equilibrium, Sulfur Dioxide

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6 Jul 2017

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With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution. Taking only private value and private cost into account, total surplus at the market equilibrium amounts to. The difference between a corrective tax and a tradable pollution permit is that a corrective tax sets the price of pollution and a permit sets the quantity of pollution. This market is characterized by a negative externality. Most taxes distort incentives and move the allocation of resources away from the social optimum. Because corrective taxes correct for market externalities, they take into consideration the well- being of bystanders. What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed? the coase theorem. The following table shows the total costs for each of four firms (a, b, c, and d) to eliminate units of pollution from their production processes.

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7. Correcting for negative externalities - Regulation versus tradable permits Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government wants to reduce total pollution in the area to 6 units, it can choose between the following two methods: Available Methods to Reduce Pollution 1. The government sets pollution standards using regulation. 2. The government allocates tradable pollution permits. Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The following table shows the cost each firm faces to eliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive. Firm Cost of Eliminating the . . . First Unit of Pollution Second Unit of Pollution Third Unit of Pollution (Dollars) (Dollars) (Dollars) Firm X 80 130 210 Firm Y 550 700 1,075 Firm Z 75 90 130 Now, imagine that two government employees propose alternative plans for reducing pollution by 6 units. Method 1: Regulation The first government employee suggests to limit pollution through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units. Complete the following table with the total cost to each firm of reducing its pollution by 2 units. Firm Total Cost of Eliminating Two Units of Pollution (Dollars) Firm X Firm Y Firm Z Method 2: Tradable Permits Meanwhile, the other employee proposes using a different strategy to achieve the governmentâs goal of reducing pollution in the area from 12 units to 6 units. He suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firms 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 X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit, while firm X 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 Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Z and a permit from firm X, so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm Z and firm X willing to sell one of their permits to firm Y ? Check all that apply. $124 $166 $200 $364 $475 Suppose the owners of the three firms get together and agree on a trading price of $147 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 amount it costs each firm to reduce pollution to the necessary level. If a firm purchases two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.) Firm Initial Pollution Permit Allocation Action Final Amount of Pollution Eliminated Cost of Pollution Reduction (Units of pollution) (Units of pollution) (Dollars) Firm X 2 Firm Y 2 Firm Z 2 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.) Proposed Method Total Cost of Eliminating Six Units of Pollution (Dollars) Regulation Tradable Permits In this case, you can conclude that eliminating pollution is costly to society 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.

byzantiumcamel839

Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government wants to reduce total pollution in the area to 6 units, it can choose between the following two methods:

	Available Methods to Reduce Pollution
1.	The government sets pollution standards using the regulation.
2.	The government allocates tradable pollution permits.

Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The following table shows the cost each firm faces to eliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive.

Firm	Cost of Eliminating the...
	First Unit of Pollution	Second Unit of Pollution	Third Unit of Pollution
	(Dollars)	(Dollars)	(Dollars)
Firm X	80	100	150
Firm Y	450	800	1,050
Firm Z	95	120	200

Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units.

Method 1: Regulation

The first government employee suggests limiting pollution through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units.

Complete the following table with the total cost to each firm of reducing its pollution by 2 units.

Firm	Total Cost of Eliminating Two Units of Pollution
Firm	(Dollars)
Firm X	?
Firm Y	?
Firm Z	?

Method 2: Tradable Permits

Meanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to 6 units. This employee suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firms 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 X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit while firm X 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 Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm X and a permit from firm Z so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm X and firm Z willing to sell one of their permits to firm Y? Check all that apply.

$102

$164

$179

$410

$708

Suppose the government has set the trading price of a permit at $182 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 amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)

Firm	Initial Pollution Permit Allocation	Action	Final Amount of Pollution Eliminated	Cost of Pollution Reduction
Firm	(Units of pollution)	Action	(Units of pollution)	(Dollars)
Firm X	2	?	?	?
Firm Y	2	?	?	?
Firm Z	2	?	?	?

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.)

Proposed Method	Total Cost of Eliminating Six Units of Pollution
Proposed Method	(Dollars)
Regulation	?
Tradable Permits	?

In this case, you can conclude that eliminating pollution is more/less costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

taupeferret828

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

ECO 2023 Lecture Notes - Lecture 10: Coase Theorem, Economic Equilibrium, Sulfur Dioxide

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