Question

Is the statement true or false? Ans explain why the statement is true or false.

Assume a firm’s marginal costs of pollution control can be expressed as MC = 10Q where Q is the units of pollution controlled. In addition, assume the firm is currently emitting 25 units of pollution per time period, Q = 0, and the government has decided to impose a tax of $20 on each unit of pollution emitted by the firm. The optimal level of pollution control for the firm is 2 units.

Answer 1

Consider the given problem here the marginal cost of pollution control is “MC=10*Q” and without any control the firm will emit “25 units” of pollution, => “Q” is zero. Now, if the government impose a tax of “$20 ” per units of pollution, => the optimum level of “Q” will be determined by the condition “MC=20”, => 10*Q=20, => Q=20/10 , => Q=2. So, the statement is TRUE.

Since if “Q < 2”, => “MC < per unit tax”, => it is optimum to reduce pollution. Now, if “Q > 2”, => “MC > per unit tax”, => it is optimum to increase pollution, => at the optimum “Q=2”.