Question

A policy has been implemented to control pollution from two firms. The marginal cost of abatement for firm 1 is $5/ton at its choice of emissions. The marginal cost of abatement for firm 2 is $3/ton at its choice of emissions.

What is true about this policy?

		This policy is optimal
		This policy is inefficient because both firms should increase their abatement
		The policy is inefficient because firm 1 should increase its abatement and firm 2 should decrease its abatement
		The policy is inefficient because firm 1 should decrease its abatement and firm 2 should increase its abatement

Answer 1

Answer- Correct option is 'D'

''The policy is inefficient because firm 1 should decrease its abatement and firm 2 should increase its abatement'', this statement is True. Because the direct pollution control are usually inefficient because by mandating the same response from all agent but the different marginal cost of pollution abatement of two firms. If one firm has a lowered abatement cost than another firm, it pays to reallocate a given amount of abatement. To minimize the total cost of any given amount of pollution abatement the lower-cost firm should abate more and the higher-cost firm less. The general conclusion is that efficient abatement requires that each firm have the same marginal cost of the last unit of abatement undertaken.