Question

Two firms, A and B, currently pollute the air. Each firm currently emits 6 units in...

Two firms, A and B, currently pollute the air. Each firm currently emits 6 units in each period. A study shows that total economic surplus can be increased by reducing the total level of emissions by 6 units. The cost to each of the two firms of reducing their emissions is shown in the table below.

Marginal Cost of Reducing Emissions ($/unit)

Unit Reduced

Firm A

Firm B

1

10

18

2

15

28

3

20

45

4

25

57

5

30

70

6

35

91
    1. What is the cost of reducing total emissions by 6 units if each firm is directed to cut back by the same amount (i.e. a reduction of 3 units per firm)?
    1. Design a policy that relies on using economic incentives (i.e. a market-based approach) that would achieve the same target level of pollution reduction at the least cost possible. Be specific in describing how this policy would work.
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