The newly elected president of an island nation has pledged to reduce air pollution. The nation has no close neighbors - the only sources of air pollution are the two domestic chemical plants run by firm A and firm B. Firm A has been in operation for 50 years and has pollution abatement costs of x3. where x is a unit of pollution. Firm B. which operates a 6 month old plant, has a pollution abatement cost of x2. Assume that neither firm is initially engaging in pollution abatement. The per unit benefit of pollution abatement experienced by the island's citizens is constant at S300.

(a) What is the socially optimal overall level of pollution abatement? What is the socially optimal allocation of that pollution across the two firms?

(b) The president considers engaging in command-and-control style quantity regulation and declares that each firm must engage in 80 units of pollution abatement. Is this socially optimal? Why or why not?

(c) Alternatively, president considers providing a subsidy of $300 per unit of pollution abatement. What is the total level and per firm level of pollution abatement? Is this socially optimal?