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Consider the environmental problem created by two chemical plants that release arsenic into a nearby river. The authorities set a standard for the waterway that


Consider the environmental problem created by two chemical plants that release arsenic into a nearby river. The authorities set a standard for the waterway that requires a total abatement level (A) for arsenic of 16 units. Suppose that the two firms, firm 1 and firm 2, face the following marginal abatement cost equations: MAC1 = 3A1 and MAC2 = A2, where costs are measured in thousands of dollars.

  1. If the state uses a uniform standard, show that such a ruling would not be cost-effective. Which firm should be abating more, and which firm should be abating less?
  2. Now find the cost-effective solution.

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