Illustrate what emissions fee should be imposed to achieve

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Reference no: EM1364339

The marginal cost of reducing pollution for each firm is as follows: MC1 = 300e1 and MC2 = 100e2, where e1 and e2 are the amounts (in tons) of emissions reduced by the first and second firms, respectively. Assume that in the absence of government intervention, firm 1 generates 100 units of emissions and firm 2 generates 80 units of emissions. (a) Suppose regulators decide to reduce total pollution by 40 units. In order to be cost effective, how much should each firm cut its pollution? (2.5 points) (b) What emissions fee should be imposed to achieve the cost-effective outcome? How much would each firm pay in taxes?

Reference no: EM1364339

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