Two firms are ordered by the federal government to reduce their pollution levels. Firm A's marginal costs associated with pollution reduction is MC=20+4Q and firm B's MC=10+8Q. The marginal benefit of pollution reduction is MB=400-4Q.
Compare the social efficiency of three possible outcomes: require all firms to reduce pollution by the same amount; charge a common tax per unit of pollution; or require all firms to reduce pollution by the same amount, but allow pollution permits to be bought and sold.
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