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Two firms are ordered by the federal government to reduce their pollution levels. Firm A’s marginal...

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.

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