5. Correcting for negative externalities - Regulation versus tradable permits

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:

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.

Now, imagine that two government employees proposed 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.

Method 2: Tradable Permits

Meanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to 6 units. This employee suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firms are free to trade pollution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.

Because firm Y has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Z and a permit from firm X so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm Z willing to sell one of its permits to firm Y, but firm X is not? Check all that apply.

$109

$142

$188

$238

$443

Suppose the the government has set the trading price of a permit at $355 per permit.

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 is willing to buy 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.)

Regulation Versus Tradable Permits

Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.)

In this case, you can conclude that eliminating pollution is   costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

Can you discuss cases with major financial institutions (AIG, Lehman Brothers, Goldman Sachs and others) and Credit Default Swaps?

Explain the law of demand. What does it imply about the shape of the demand curve? What relationship is shown by a demand curve?

A. What is meant by “time inconsistency of discretionary policies” ? What is the problem with it? Give an example of time inconsistency.

B. What is moral hazard? How do financial institutions deal with moral hazard? (2 marks)

Evaluate a company's recent actions (within the last six months) dealing with risk and uncertainty.

Offer advice for improving risk management.

Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.

Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.

Identify a principal-agent problem in your company and evaluate the tools it uses to align incentives and improve profitability.

Examine the organizational structure of your company and suggest ways it can be changed to improve the overall profitability.

Use at least five quality academic resources in this assignment. One reference must be about the risk and uncertainty the company has faced in the last six months.

Given the supply chain disruptions caused by the Coronavirus (Covid 19) that commenced in China and rippled throughout the globe please research and address the following aspects:

• Were organizations inordinately focused on procuring inexpensive components and products from China at the expense of supply chain diversification? (Feel free to use specific companies or industries in your analysis.) Use specific organizational examples.
• What steps should an organization implement to better mitigate supply chain risk?

A. what is mean by "time inconsistency of discretionary policies" what is the problem with it? Given an example of time inconsistency.

B. What is moral hazard? How do financial institutions deal with moral hazard?

Problem 2

Consider the links between the product market, the money market and the foreign exchange market.

Part (a)

What do you expect will happen in the money market because of the economic slowdown as a direct consequence of the COVID-19 crisis – what curve will shift, why and in which direction? In your answer do NOT include action taken by the central bank, ie monetary policy impact.  

Part (b)

What is the impact on the interest rate as a result of part (a) above?  (0.5 mark)

Part (c)

Based on the change in the interest rate of part (b) above, consider the foreign exchange market:

(i) Which curve(s) will shift?   (0.5 mark)

(ii) In which direction will the curve(s) in part (i) above shift and why?   

(iii) What is the impact on the exchange rate as a result of parts (i) and (ii) above?  (0.5 mark)

(iv) How will the change in the exchange rate from part (iii) above affect exports, imports and thus net exports.   (1.5 mark)s

(v) How will this affect the AD-AS model – which curve(s) will shift, in which direction and why?   

What is meant by 'time inconsistency of discretionary policies'? what is the problem with it? One example of time inconsistency?

what were the impact and strategies used by Coca-COLA during 2008-2010 financial crisis? what were the strategies used post the recession by coca-cola?

Oliver's PPC crosses the x-axis at (3,0) and the y-axis at (0,3). Claire's PPC crosses the x-axis at (6,0) and the y-axis at (0,12). Group of answer choices

Oliver has a comparative advantage in producing the good represented on the x-axis.

Claire has nothing to gain to trade with Oliver. Claire has an absolute advantage in both goods.

The opportunity cost of producing the good on the x-axis is greater for Oliver than for Claire.

1. How does the Bank of Canada open market operation of purchasing bonds from chartered banks effect the components of the GDP = C+I+G+X-M? Be sure to mention exchange rates in your answer.

2. Draw the Canadian economy initially in long-run equilibrium at potential GDP of Yp and price level P1. Use that AD/AS model to illustrate the effect of each of the three following separate shocks to the model in the short run.

A) Explain what happens to aggregate output and the aggregate price level.

B) Determine whether the economy faces a short-run recessionary gap or an inflationary gap.

C) What type of monetary and fiscal policies will offset each particular shock to close the gap and return to potential GDP? Expansionary or contractionary? Explain.

1. Consumer confidence in the economy increases.
2. Housing prices fall and are not recovering.
3. Oil prices increase dramatically.

1. Basically, the concept of corporate culture reflects long standing capitalist tradition in which workers are regarded as commodity and the main objective of business is to maximize profits.

a. Why does capitalist tradition matter for workers?

b. What is the role of ethics of capitalism in the pursuit of corporate profit?

Below are some data from the land of milk and honey.

YEAR       PRICE OF MILK        QUANTITY OF MILK    PRICE OF HONEY        QUANTITY OF HONEY

2001                $1                                100 Qts.                     $2                               50 qts.

2002                $1                                200                              $2                                100

2003                $2                                200                              $4                                100

1. Compute for each year the following below using 2001 as the base year.

a) nominal GDP

b) real GDP,and

c) the GDP deflator for each year, using 2001 as the base year.

2. Why do economists use real GDP rather than nominal GDP to gauge economic well being?