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.
Please find the answer attached.
MC = 20 + 4Q1
MC = 10 + 8Q2
MB = 400 - 4Q
1. Require all firms to reduce pollution by the same amount
For MB = MC,
Total MC = Total MB
Thus 30 + 4Q1 + 8Q2 = 400 - 4Q1 - 4Q2
Q1 = Q2
Thus Q1 = ...
Fully answered Solution