Question

Two firms are ordered by the federal government to reduce their pollution levels. Firm A’s marginal costs associated with pollution reduction are MC = 20 + 4Q. Firm B’s marginal costs associated with pollution reduction are MC = 10 + 8Q. The marginal benefit of pollution reduction is MB = 400 – 4Q.
a. What is the socially optimal level of each firm’s pollution reduction?
b. Compare the social efficiency of three possible outcomes:
(1) Require both firms to reduce pollution by the same amount;
(2) Charge a common tax per unit of pollution;
(3) Require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold.


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  • CreatedApril 25, 2015
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