Question
Quantity regulations versus Pigouvian taxes Consider Two firms that operate in a perfectly competitive market. While producing their products, these firms generate pollution. Assume that
Quantity regulations versus Pigouvian taxes Consider
Two firms that operate in a perfectly competitive market. While producing their products, these firms generate pollution. Assume that it is possible to reduce pollution by adopting an expensive technology. The marginal cost of pollution reduction is MCA= 6xA for firm A and MCB= 4xB for firm B (where x is the number of abated pollution units).
a) Suppose that the government introduces a quantity regulation and mandates each firm to reduce pollution by 20 units. In other words, xA=xB= 20. What is the total cost of pollution abatement in this case?
b) Now consider an alternative regulation: a Pigouvian tax on pollution. Following the notes from class, solve for and when the government introduces a tax on pollution of $96 per unit of pollution. Note that, if your solution is correct, xA + xB should be equal to 40. What is the total cost of pollution abatement in this case?
c) Which type of regulation is more efficient and why? Would your answer to this question change if the marginal cost was the same for both firms? Explain why.
d) Now assume that the marginal cost of pollution abatement for firm A increases to MCA= 12xA, While the marginal cost for firm B remains at MCB= 4xB. Compute the Pigouvian tax that would achieve xA + xB = 40.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started