Question

Two firms are ordered by the federal government to reduce their pollution levels. Firm A’s marginal costs associated with pollution reduction are MCA = 20+4QA. Firm B’s marginal costs associated with pollution reduction are M CB = 10 + 8QB . The marginal benefit of pollution reduction is M B = 400 − 4(QA + QB ). (a) What is the socially optimal level of each firm’s pollution reduction? (b) Compare the social efficiency of three possible outcomes: (1) require both firms to reduce pollution by the same amount. (2) charge a common tax per unit of pollution. (3) require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold.

Answer 1