A C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 A A Regulating

# A c t i v e l e a r n i n g a c t i v e l e a r n i n

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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   2 2         A.   A.   Regulating lower SO Regulating lower SO 2 2  emissions  emissions 23
Each firm must reduce emissions by 10 tons. Cost of reducing emissions: \$100/ton for Acme, \$200/ton for USE. Compute cost of achieving goal with this policy: Cost to Acme: (10 tons) x (\$100/ton) = \$1000 Cost to USE: (10 tons) x (\$200/ton) = \$2000 Total cost of achieving goal = \$3000 A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   2 2         A.   A.   Answers Answers 24
Initially, Acme and USE each emit 40 tons SO 2 /month. Goal: reduce SO 2 emissions to 60 tons/month total. Policy option 2: Tradable pollution permits Issue 60 permits, each allows one ton SO 2 emissions. Give 30 permits to each firm. Establish market for trading permits. Each firm may use all its permits to emit 30 tons, may emit < 30 tons and sell leftover permits, or may purchase extra permits to emit > 30 tons. Your task: Compute cost of achieving goal if Acme uses 20 permits and sells 10 to USE for \$150 each. A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   2 2         B.   B.   Tradable pollution permits Tradable pollution permits 25
Goal: reduce emissions from 80 to 60 tons Cost of reducing emissions: \$100/ton for Acme, \$200/ton for USE. Compute cost of achieving goal: Acme sells 10 permits to USE for \$150 each, gets \$1500 uses 20 permits, emits 20 tons SO 2 spends \$2000 to reduce emissions by 20 tons net cost to Acme: \$2000 - \$1500 = \$500 continued… A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   2 2         B.   B.   Answers Answers 26
Goal: reduce emissions from 80 to 60 tons Cost of reducing emissions: \$100/ton for Acme, \$200/ton for USE. USE buys 10 permits from Acme, spends \$1500 uses these 10 plus original 30 permits, emits 40 tons spends nothing on abatement net cost to USE = \$1500 Total cost of achieving goal = \$500 + \$1500 = \$2000 Using tradable permits, goal is achieved at lower total cost and lower cost to each firm than using regulation. A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   2 2         B.   B.   Answers Answers continued continued 27
EXTERNALITIES 28 Tradable Pollution Permits A tradable pollution permits system reduces pollution at lower cost than regulation. Firms with low cost of reducing pollution sell whatever permits they can. Firms with high cost of reducing pollution buy permits. Result: Pollution reduction is concentrated among those firms with lowest costs.
EXTERNALITIES 29 Tradable Pollution Permits  in the Real World SO 2 permits traded in the U.S. since 1995.

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• Fall '12
• Berk
• Externalities, Market failure, DICK, Externality