Socially optimal level of each firms pollution reduction

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Two firms are ordered by the federal government to reduce their pollution levels. Firm A's marginal costs associated with pollution reduction is MC = 20 1 4Q.

Firm B's marginal costs associated with pollution reduction is MC = 10 1 8Q. The marginal benefit of pollution reduction is MB = 400 - 4Q.

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

b. Compare the social efficiency of three possible outcomes:

(1) require all firms to reduce pollution by the same amount;

(2) charge a common tax per unit of pollution; or

(3) require all firms to reduce pollution by the same amount, but allow pollution permits to be bought and sold.

Reference no: EM131184842

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