Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

French Banking And Entrepreneurialism In China And Hong Kong From The 1850s To 1980s

Authors: Hubert Bonin

1st Edition

0429560095, 9780429560095

More Books

Students also viewed these Economics questions