Question

there are two firms whose factories sit alongside a lake. it costs each firm $1,800 to install filters to avoid polluting the lake. because both firms use the lake's water to produce goods, a polluted lake hurts their production process and increases their costs. assume that the cost to each firm of a polluted lake is $1,200 times the number of polluting firms

Answer 1

The firms will choose to reduce pollution to the extent that the marginal cost of abatement is less than the pollution tax, which in this case results in a reduction of 30 pounds, given the pollution charge set at $1,000.

Step-by-step explanation:

The question relates to an economic scenario where firms have to decide whether to install filters to prevent pollution or face increased production costs due to a polluted lake. This illustrates the concept of externalities and how government interventions like taxes can influence firm behavior regarding pollution. When faced with a pollution tax, a firm will calculate the cost of abatement (reducing pollution) versus the cost of paying the tax. If abatement costs less than the tax, the firm will choose to reduce emissions.

For example, if the firm faces a pollution charge of $1,000 for every 10 pounds of particulates emitted, and the cost of reducing pollution is $300 for the first 10 pounds, $500 for the second 10 pounds, and $900 for the third 10 pounds, the firm will opt to reduce pollution by 30 pounds because it is cheaper than paying the corresponding pollution charges.

This aligns with the provided reference that states if a pollution charge is set equal to $1,000, then the firm has an incentive to reduce pollution by 30 pounds as the cost of these reductions ($900) is less than the cost of the pollution charge.