Question

Slipshod Plastic Corp. produces both plastic materials and water pollution. Suppose that Slipshod currently produces 30 gallons per minute of polluted water. Company officials estimate that the marginal cost of reducing pollution is: MC(h) = 40 - h, where h is measured in gallons of polluted water per minute. Health officials estimate that the marginal benefits of reducing emissions from Slipshod are: MB(h) = 3h

(a) What would be the level of per unit tax on pollution that would yield an efficient outcome?

(b) How much would Slipshod pay in taxes given the tax rate from part (a)?

(c) Suppose instead of taxing pollution, the government decided to subsidize emission reductions. What would be the per unit subsidy on emissions reduction that would yield an efficient outcome?

(d) How do the results of the tax scheme differ from the results of the subsidy scheme? Is either scheme a better method for regulating pollution than the other? Explain.

Answer 1

(a)

40 – h = 3h

40 = 4h

H = 40/4

= 10 Gallon per minutes.

MC (h) = 40 -10

= 30

Thus, per unit tax should be equal to $ 30

(b)

Total tax payments per minutes = 10*30

= $ 30

(c)

There is no difference between the imposition of tax and subsidies. Subsidies would be applied at similar rate. Hence, per unit subsidies would be $30

(d)

Both subsidies and tax are supposed to produce similar result. But generally, in this situation tax is preferred over the subsidies. Tax generates revenue for government that can be spent on the abatement of pollution. While subsidy does not produce any revenue.