Two power plants are currently emitting 8,000 tons of pollution each (for a total of 16,000 tons). Pollution reduction costs for Plant 1 are given by MCR 1 = 0.02 Q and for Plant 2 by MCR 2 = 0.03 Q , where Q represents the number of tons of pollution reduction. Analyze the effects of the following policies in terms of pollution reduction costs for each firm, government revenues, and total pollution reduction:
A regulation requiring each plant to reduce its pollution by 5,000 tons.
A pollution tax of $120 per ton of pollution emitted.
A tradable permit system in which permits for emissions of 6,000 tons of pollution are issued, 3,000 to each plant. Use a diagram similar to Figure 16.5 , showing 10,000 tons of total pollution reduction. Indicate which firm will sell permits (and how many), and which firm will buy permits.
Are there different circumstances in which one of these policies might be preferable over the others? What factors should policy makers take into account when deciding on a pollution control policy?