Firms A and B each emit 100 units of pollution.The federal government wants to reduce pollution emissions.The marginal costs associated with pollution reduction are MC_A= 24 + 3Q^Afor Firm A and MC_B= 36 + 4Q^Bfor Firm B, where Q^Aand Q^Bare the units of pollution emissionsreducedby each firm.The social marginal benefit (SMB) from pollution reduction is a constant $228 for every unit of pollution emissions reduced.

1.What is the optimal level of pollution reduction for each firm?

2.Given the optimal amount of reduction by each firm, how many units of pollution, in total, are still emitted (i.e. what is the optimal level of pollution emissions)?

3.Suppose the government requires both firms to reduce pollution by the same amount, but allows pollution permits to be bought and sold.

-Which firm would sell permits, and which firm would buy permits?

-At what price of a permit would neither firm gain from buying or sellling a permit?

4.Why are both policies above (corrective tax or quantity regulation with tradable permits) equally efficient, in theory?