What is the optimal level of pollution

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Assignment:

Assume an economy of two firms and two consumers. The two firms pollute. Firm one has a marginal savings function of MS1(e) = 8 - e where e is the quantity of emissions from the firm. Firm two has a marginal savings function of MS2(e) = 8 - 2e. Each of the two consumers has marginal damage MDi(e) = e, where e in this case is the total amount of emissions the consumer is exposed to.

a) Calculate and graph the firm-level and aggregate marginal savings functions.

b) Calculate and graph the individual and aggregate marginal damage function.

c) What is the optimal level of pollution?

d) What is the appropriate Pigovian fee required to produce the optimal level of pollution?

e) How much does each firm emit with the Pigovian fee?

Reference no: EM133441391

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