4 Suppose a country has two firms, each engaged in different industries.

Suppose that the marginal cost of pollution reduction (MCR) at one firm is given by:

where QR is the amount of reduced pollution, and the marginal cost of pollution reduction at the other firm is given by:

Note that the firm with MCR given by (11.1) has a higher level of marginal reduction cost at all levels of pollution than the firm with the MCR given by (11.2), hence the labels “H,” for high-cost, and “L” for lowcost.

Assume that, in the absence of laws against pollution in this country, each firm will pollute 100 units.