Question

Explain the concept of optimal pollution. Why might an ardent environmentalist and an economist have different views as to where "optimal" was?

Answer 1

Answer)

The optimum level of pollution refers to the point where marginal social costs equal marginal social benefits. Firms pollute and pay tax as long as that costs less than abating. They want to reduce their pollution if they cost of abating one more unit is less than cost of paying tax on one more unit. When firms have different marginal abatement cost at a given standard limit of pollution, it is in high-cost firm’s interest to offer to buy permits from low cost firms. The low cost firm would demand a price no less than their own marginal abatement cost and the high cost firm will not agree to pay higher price than their own marginal benefit.