Question

Two firms are ordered by the federal government to reduce their pollution levels.

Firm A's marginal costs associated with pollution to reduction is MC = 20 + 4Q.
Firm B's marginal costs associated with pollution reduction is MC = 10 + 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 both firms to reduce pollution by the same amount;
2. charge a common tax per unit of pollution;
3. require both firms to reduce pollution by the same amount but allow pollution permits to be bought and sold.

Answer 1

The solution and complete explanation for the above question and mentioned conditions is given below in the attached document.I hope my explanation will help you in understanding this particular question.

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