Compare the social efficiency of three possible outcomes

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Reference no: EM131241013

Two firms are ordered by the federal government to reduce their pollution levels.

Firm A’s marginal costs associated with pollution reduction is MC = 150 + 3Q.

Firm B’s marginal costs associated with pollution reduction is MC = 9Q.

The marginal benefit of pollution reduction is MB = 270.

a. What is the socially optimal level of each firm’s pollution reduction?

QA=40, QB=30

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.

Reference no: EM131241013

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