Find the efficient level of gunk reduction

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Suppose that gunk has marginal benefits of reduction equal to 20 - 2x, and marginal costs of reduction equal to 5 + x/2, where x is the tons of gunk reduced.

1. Graph the MB and MC curves to find the efficient level of gunk reduction.

2. As a result of imperfect information, regulators are considering two inefficient policies: a tax 10% below the efficient tax level and a marketable permit system with the number of permits to be issued 10% below the efficient reduction level. Use your graph to show the monetary loss to society as a whole of the different policies. Which is more efficient?

3. Suppose regulators did not know exactly where the MB curve lay, but did know that gunk was a threshold pollutant. Should they use a tax or permit system if they are interested in efficient regulation? Why?

Reference no: EM131212341

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