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, eliminating all 4 units of pollution) is prohibitively expensive.

Cost of Eliminating the . . .
First Unit of Pollution Second Unit of Pollution Third Unit of Pollution
Firm (Dollars) (Dollars) (Dollars)
Firm X 90 125 180
Firm Y 55 70 110
Firm Z 650 800 1,500

Now, imagine that two government employees propose alternative plans for reducing pollution by 6 units.

Method 1: Regulation

The first government employee suggests to limit 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 action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm purchases two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)

Firm Initial Pollution Permit Allocation Action Final Amount of Pollution Eliminated Cost of Pollution Reduction
(Units of pollution) (Units of pollution) (Dollars)
Firm X 2
Firm Y 2
Firm Z 2

Determine the total cost of eliminating six units of pollution using both methods.
In this case, you can conclude that eliminating pollution is (more / less) costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.