# Homework Market Failure Externalities, Public Goods, and Asymmetric.docx

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Homework: Market Failure: Externalities, Public Goods, and Asymmetric Information (Ch 17) 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,

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Unformatted text preview: eliminating all 4 units of pollution) is prohibitively expensive. First Unit of Pollution (Dollars) Cost of Eliminating the ... Second Unit of Pollution (Dollars) 130 700 Third Unit of Pollution (Dollars) Firm Firm X 210 Firm Y 550 1,075 130 Firm z 90 Now, imagine that two government employees propose 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. Total Cost of Eliminating Two Units of Pollution (Dollars) Firm Firm X Firm Y Firm Z...
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