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ECON 10a Lecture Notes - Lecture 10: Deadweight Loss, Coase Theorem, Global Warming

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rubysea-lion113
16 Feb 2017
School
Brandeis University
Department
Economics
Course
ECON 10a
Professor
Coiner Harry( Michael)

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Document Summary

In direct regulation, the epa, orders firms to reduce their emissions by a certain amount. The goal is to reduce pollution at the lowest possible cost. Firms vary in how costly it is to reduce pollution. Can reduce their production of carbon fairly cheaply. Can reduce their production of carbon at a higher cost. It treats high cost and low cost reducers, the same! Each firm is not yet subject to any pollution regulation. Produce 30 tons of carbon a year. Total carbon is 60 tons a year. The gov"t has a goal of reducing carbon by 10% overall. If direct regulation is used, the epa is likely to ask both firms to eliminate the same amount, say 3 tons of carbon, but this is done at different cost to each firm. With regulation, 10 % reduction would cost 18 dollars. In every case a pigovian tax generates a reduction in pollution at lowest.

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Related Questions

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 government’s 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.

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
(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
(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 more/less costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

Two firms, A and B, each currently emit 100 tons of pollution into the air. To reduce the pollution from now on, the EPA will require a pollution permit for each ton of pollution emitted into the air. EPA limits pollution to 60 tons, giving each firm 30 pollution permits. It costs firm A $100 for each ton of pollution that it eliminates before it is emitted into the air, and it costs firm B $50 for each ton of pollution that it eliminates before it is emitted into the air.

1. What is the total cost of current production if EPA orders the firms to reduce pollution to 60 tons?

2. If the two firms can buy or sell pollution permits from each other, assume a price of $75 per permit is negotiated, what is the potential cost to each firm if the existing production is maintained?