Final answer:
The optimal level of pollution reduction occurs where the marginal benefits equal the marginal costs, which in the given context is at four million gallons of pollution reduction. This reflects a point of efficient resource allocation in environmental protection, aligning with option 4 in the question.
Step-by-step explanation:
The optimal level of pollution reduction is a concept within environmental economics that aims to find the most efficient allocation of resources when considering environmental protection. According to the principles of marginal analysis, this occurs at the point where the marginal benefits of reducing pollution are equal to the marginal costs. In the context provided, this equilibrium is identified at the reduction of four million gallons of pollution.
When analyzing the marginal costs and marginal benefits of pollution reduction, we find that the marginal costs usually increase the more we reduce pollution because the cheapest and easiest methods are implemented first. Subsequently, more expensive methods must be used. On the other hand, the marginal benefits tend to decrease over time because the most beneficial reductions happen initially when pollution levels are high. Over time, additional reductions yield less benefit.
Thus, optimal pollution reduction is achieved not when the total benefits exceed the total costs by the largest amount, but rather when the additional, or marginal, benefit of the last unit of pollution reduction equals the additional, or marginal, cost of the last unit of pollution reduction. Therefore, the most accurate answer is number 4).