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optimal level of pollution

Assume an economy of two firms and two consumers. The two firms pollute. Firm 1 has a marginal savings function of MS1(e) = 5-e where e is the quantity of emissions from the firm. Firm 2 has a marginal savings function of MS2(e) = 8-2e. Each of the two consumers has a marginal damage MD(e) = e, where e in this case is the total amount of emissions the consumer is exposed to.

1. Graph the firm-level and aggregate marginal savings functions
2. Graph the aggregate demand function
3. What is the optimal level of pollution, the appropriate Pigouvian fee, and the emissions from each firm?

Solution Summary

The appropriate Pigouvian fee is determined.