Suppose two companies emit a particular pollutant. The marginal cost of reducing business pollution 1 is MC1 = 400q1 while the corresponding marginal cost for business 2 is MC2 = 100q2 (where 1 q and 2 q are the quantities of pollutant emissions that the first and second companies reduce, respectively) . Without government intervention, enterprise 1 generates 100 pollution units and enterprise 2 generates 80 pollution units.

Cost effective allocation of pollution reduction requires that

MC₁=MC₂

400q₁=100q₂

4q₁=q₂

Regulation requires that

q₁+q₂=50

Set q₂=4q₁

q₁+4q₁=50

5q₁=50

q₁=10 (Amount of pollution reduction by company 1)

q₂=4q₁=4*10=40  (Amount of pollution reduction by company 2)

Calculate the pollutant emission charge that must be imposed in order to achieve a cost-effective result. What will be the tax burden of each business in this case?

Answer rating: 100% (QA)

1 Find the marginal cost at the required reduction levels For company 1MC1 400 10 4000 For company ... View the full answer