Reference no: EM133130010

Firms A and B each produce 80 units of pollution. The federal government wants to reduce pollution levels. The marginal costs associated with pollution reduction are MC(A) = 50 + 3Q(A) for firm A and MC(B) = 20 + 6Q(B) for firm B, where Q(A) and Q(B) are the quantities of pollution reduced by each firm. Society's marginal benefit from pollution reduction is given by MB = 590 - 3Q(T), where Q(T) is the total reduction in pollution.

1. What would be the optimal common tax per unit to charge these firms?

2. The government has decided to split the optimal total quantity of pollution reduction required evenly among the two firms and allow the trading of permits. Plot a graph illustrating the marginal costs and benefits for firm B to pay firm A to handle a part of its pollution reduction requirement.