Provide subsidy for pollution reduction to firms

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Reference no: EM132223019

The government decides to provide a subsidy for pollution reduction to firms.

(a) The government wishes to reduce pollution against the maximum pollution extent of Z-bar. The firm produces pollution Z(q) for each q units of output. If the government pays Dollars s per unit of pollution reduction, what is the total subsidy to the firm when it produces output q?

(b) Assuming the cost of producing q units of goods is C(q) write down the profits of the firm including the subsidy payment.

(d) What is the impact of subsidy on average cost of the firm?

(e) Show the new equilibrium price assuming free entry of firms.

(f) What is the impact on overall demand and supply of goods.

(g) Explain the impact on overall pollution reduction using subsidies compared with the use of Pigovian taxes. Illustrate using suitable graphs.

Reference no: EM132223019

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