QUESTION ONE Two firms are ordered by the 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 the three possible outcomes: (1) require both firms to reduce pollution by the same amount; (2) charge a common tax per unit of pollution; (10 marks) (3) require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold. (15 marks) [Total = 25 marks] 17°C Partly cloudy
QUESTION ONE Two firms are ordered by the 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 the three possible outcomes: (1) require both firms to reduce pollution by the same amount; (2) charge a common tax per unit of pollution; (10 marks) (3) require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold. (15 marks) [Total = 25 marks] 17°C Partly cloudy
Chapter19: Externalities And Public Goods
Section: Chapter Questions
Problem 19.9P
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