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. 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; (3) require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold.
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. 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; (3) require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold.
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter10: Externalities
Section10.1: Externalities And Market Inefficiency
Problem 1QQ
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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. 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;
(3) require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold.
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