The answers to your posted questions are embedded below:
8) Many observers beleive that the levels of pollution in our economy
are too high.
a)if society wishes to reduce overall pollution by a certain amount,
why is it efficient to have different amounts of reduction at
Since firms all generate pollution for different reasons and as the
result of different types of activities, it is reasonable to believe
that the cost of reducing or eliminating pollution will vary by firm.
Therefore, it is optimal for firms to pay the same amount
(proportionally) in the effort to reduce pollution. However, even
though firms may put the same amount of money towards reducing
pollution, the level of pollution reduction will certainly vary. This
is efficient because it prevents over-penalizing firms who would find
it very difficult to reduce their emmisions (ie. very costly and time
b)Command-and-control approaches often rely on uniform reductions
among firms. Why are these approaches generally unable to target the
firms that should undertake bigger reductions?
Uniform reductions are those that require all firms to reduce their
own pollution by the same amount. This is ineffective in targeting
firms that should undertake bigger reductions because it does not
consider the cost or difficulty involve in reducing pollution for each
firm. Generally the firms that should undertake bigger reductions are
those who can do it relatively easily compare to other firms - this
way pollution is reduced at a lower overall cost.
c) Economists argue that appropriate Pigovian taxes or tradable
pollution rights will result in efficient pollution reduction.
How do these approaches target the firms that should undertake bigger
Pogovian taxes penalize firms for every unit of pollution - only firms
that would find it more expensive to reduce their emissions would opt
for the tax. All other firms would take actions to reduce their
pollution, which would be cheaper than paying this tax.
Tradeable pollution rights impose a sort of bidding system where the
holder of the rights is permitted to pollute a certain amount. Since
firms who would have a difficult time reducing emissions would value
these rights the most, they would be willing to pay the most to hold
these rights. If the pollution rights were held by a firm that didn't
value it as highly, they would be more likely to sell it since they
would profit as a result.
9) The Pristine River has two polluting firms on its banks. Acme
Industrial ans Creative Chemicals each dump 100 tons of glop into the
river each year. The cost of reducing glop emissions per ton equals
$10 for Acme and $100 for Creative. the local government wants to
reduce overall pollution from 200 tons to 50 tons.
a)If the government knew the cost of reduction for each firm, what
reductions would it impose to reach its overall goal? What would be
the cost to each firm and the total cost to firms togther?
The government would impose a reduction of 100 tons for Acme and the
remaining 50 tons for Creative. This solution would minimize the total
cost of reducing the pollution. This cost would be:
$10*100 tons + $100*50 tons = $1000 + $5000 = $6000
b)In a more typical situation, the government woud not know the cost
of pollution reduction at each firm. if the government decided to
reach its overall goal by imposing uniform reductions on firms,
calculate the reduction made by each firm, the cost to each firm, and
the total cost to the firms together.
Uniform reductions would result in the following total cost:
$10*75 tons + $100*75 = $750 + 7500 = $8250
c)Compare the total cost of pollution reduction in parts (a) and (b).
If the government does not know the cost of reduction for each firm,
is there still some way for it to reduce pollution to 50 tons at the
total cost you calculated in part (a)? Explain.
The cost in (a) is clearly more efficient than (b) as the same amount
of pollution reduction is occuring for a full $2250 less!
In theory, it would still be possible to reach the optimal solution if
the government didn't know the cost of reduction for the firms. This
could be done by using Pigovian taxes or tradeable pollution rights.
In the case of the tax, Acme would take action to reduce its pollution
because it was a less expensive option than paying tax to keep
polluting. The key here would be choosing the tax rate that would
result in the optimal balance in pollution reduction.
Tradeable pollution rights would work as well - if the firms were each
given equal rights to pollute, Creative would attempt to buy Acme's
rights in an attempt to avoid reducing their pollution (which would be
far more expensive than Acme). In this case the variable that would
control reaching the optimal solution would be the price at which Acme
would sell the rights to Creative.
Hopefully this helps answer your questions - if you don't understand
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