Question:

Two firms can control pollution with the following marginal costs of pollution reduction:

MC1 =1000e1,MC2 =40004e2

where e1 and e2 are the level of pollution emissions by the first and second firms respectively. Suppose that the government sets a pollution goal of 1800 units of total pollution.

(a) If the firms wanted to minimize (marginal) costs, what level of emissions would each firm choose.

(b) Compute the level of emission reduction per firm that is cost effective for society.

(c) What emissions fee (tax) should the government impose to achieve the cost effective solution you computed in part b.?

(d) Suppose the government imposes the emissions fee (tax) you found in part c. Compute the following:

i Firm 2's total tax bill. ii. Firm 2's total abatement costs.