The Pristine River has two polluting firms on its banks. European Industrial and Creative Chemicals each dump 100 tonnes of effluent into the river a year. The cost of reducing effluent emissions per tonne equals €10 for European Industrial and €100 for Creative. The government wants to reduce overall pollution fro 200 tonnes to 50 tonnes per year.

a. If the government knew the cost of reduction for each firm, what reductions would it impose to reach its overall goal?

What would be the cost to each firm and the total cost to the firms together?

b. In a more typical situation, the government would not know the cost of pollution reduction at each firm. If the government decided to reach its overall goal by imposing uniform reductions on the firms, calculate the reduction made by each firm, the cost to each firm and the total cost to the firms together.

c. Compare the total cost of pollution reduction in parts (a) and (b). If the government does not know the cost of reduction for each firm, is there still some way for it to reduce pollution to 50 tonnes at the total cost you calculated in part (a)?Explain.

d. Assume that the chief executive officers of European Industrial and Creative Chemicals have considerable influence with politicians and civil servants from the country’s Department of Industry. How might market outcomes be changed as a consequence?