1. Assume an economy of two firms and two consumers. The two firms pollute. Firm one...

Transcribed Image Text:

1. Assume an economy of two firms and two consumers. The two firms pollute. Firm one has a marginal savings function of MS, (e) = 5 - e where e is the quantity of emis- sions from the firm. Firm two has a marginal savings function of MS₂(e) = 8 - 2e. Each of the two consumers has marginal damage MD(e) = e, where e is this case is the total amount of emissions the consumer is exposed to. Graph the firm-level and aggregate marginal savings functions. Graph the aggregate marginal damage function. a. b. C. What is the optimal level of pollution, the appropriate Pigovian fee, and emis- sions from each firm? 1. Assume an economy of two firms and two consumers. The two firms pollute. Firm one has a marginal savings function of MS, (e) = 5 - e where e is the quantity of emis- sions from the firm. Firm two has a marginal savings function of MS₂(e) = 8 - 2e. Each of the two consumers has marginal damage MD(e) = e, where e is this case is the total amount of emissions the consumer is exposed to. Graph the firm-level and aggregate marginal savings functions. Graph the aggregate marginal damage function. a. b. C. What is the optimal level of pollution, the appropriate Pigovian fee, and emis- sions from each firm?