Suppose that gunk has marginal benefits of reduction equal to 20 − 2x, and marginal costs of reduction equal to 5 + x/2, where x is the tons of gunk reduced.
1. Graph the MB and MC curves to find the efficient level of gunk reduction.
2. As a result of imperfect information, regulators are considering two inefficient policies: a tax 10% below the efficient tax level and a marketable permit system with the number of permits to be issued 10% below the efficient reduction level. Use your graph to show the monetary loss to society as a whole of the different policies. Which is more efficient?
3. Suppose regulators did not know exactly where the MB curve lay, but did know that gunk was a threshold pollutant. Should they use a tax or permit system if they are interested in efficient regulation? Why?