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The Cost of Production

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A brick factory's main inputs are energy (8000 units a £10 each) and labour (4000 units at £10 each). A new environmental policy will tax energy and subsidise labour so that the firm's costs are unaffected. The Government plans a 1% tax on energy use. An adviser has suggested that a labour subsidy of 2% would leave the costs of the factory unchanged. What is wrong with this?

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For efficient level of production, we need that MPE/MPL = CE/CL. Now if the cost of the energy is increased ...

Solution Summary

The Cost of Production is assessed. Environmental policy tax energy and subsidise labours are determined.