3 firms a, b, and c. A emits 15 units of pollution @ $1 cost to reduce pollution. B. emits 30 units @ $2 reduction cost. C. 45 units at $3 cost of reduction. Policy makers are seeking to cut pollution in half (90 to 45 units). How to go about it in a fair efficient way. 1. the dirtiest producer cleans firs,t all 45 units, 2. each firm cuts its own pollution in half, thus reducing overall pollution to 45 units. 3. 45 tradable pollution permits are issued. Questions: 1. Which of these alternatives is the fairest, why? 2. Which is the most efficient alternative? 3. If efficiency is desirable, why must the permits be tradable?
What do you think?
To determine the fairest and most efficient alternative for reducing pollution in this scenario, we need to evaluate the options and consider the concepts of fairness and efficiency.
1. The fairest alternative:
- Alternative 1 suggests that the dirtiest producer cleans all 45 units. This option may seem fair in terms of burden sharing because the polluter responsible for the most pollution takes on the entire reduction. However, from an economic perspective, it might not necessarily be fair because it imposes a higher cost on one specific firm.
2. The most efficient alternative:
- Alternative 2 proposes that each firm cuts its own pollution in half, reducing overall pollution to 45 units. In terms of efficiency, this option ensures that all firms contribute proportionally to the pollution reduction efforts. It distributes the cost of pollution reduction across all firms based on their initial emissions, promoting fairness and efficiency simultaneously.
3. Tradable permits and efficiency:
- Tradable pollution permits are certificates that allow firms to emit a certain amount of pollution. If efficiency is desirable, these permits must be tradable. By allowing permits to be bought and sold in a market, firms have the flexibility to choose the most cost-effective way to reduce pollution, either by lowering their emissions or purchasing permits from others who can reduce pollution at a lower cost.
- Tradability ensures that pollution reductions occur where they are most economically efficient. It encourages firms to compare the cost of reducing pollution internally with the cost of purchasing permits. Firms that can reduce pollution at a lower cost will do so, while others may find it more economical to purchase permits from those firms.
In summary, the most fair and efficient alternative for reducing pollution in this scenario would be Alternative 2: each firm cuts its own pollution in half. Additionally, the use of tradable permits enhances efficiency by allowing firms to compare costs and achieve pollution reduction at a lower overall cost.