Suppose there are only two firms?Softies Inc. and Cuddlies Inc.? producing disposable diapers. Both firms are releasing dioxins into the same river. To reduce the pollution, the regulatory agency must choose between using direct regulatory controls and emissions taxes. The following diagrams show each firm?s marginal cost of pollution abatement.

a. Suppose the regulatory agency requires that the two firms each abate Q₃ units of pollution. What is each firm?s marginal abatement cost at Q₃?

b. Could the total cost of this amount of pollution abatement be reduced? Explain how.

c. Now suppose the regulatory agency instead imposes an emissions tax of $40 per unit of emissions. Explain why this tax can be thought of as each firm?s ?marginal benefit of abatement.?

d. In part (c), show on the diagram how much pollution each firm will choose to abate.

e. Is it possible to reduce the total cost of the amount of abatement being done in part (d)?

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мC 40 30 20 10 Abatement by Softies Inc. 50 40 30 20 10 Abatement by Cuddlies Inc. Dollars per Unit Dollars per Unit