Question 1 - 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 = 6 for firm A and = 4 for firm B (where x is the number of abated pollution units). Note that in class we solved this exercise, but with different numbers. Review your notes from class before attempting the following questions.

a) Suppose that the government introduces a quantity regulation and mandates each firm to reduce pollution by 20 units. In other words, = = 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, 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