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Two companies discharge wastewater into the same watercourse. Residents in the area would be willing to reduce emissions. We assume in the following that the
Two companies discharge wastewater into the same watercourse. Residents in the area would be willing to reduce emissions. We assume in the following that the willingness to pay to reduce emissions by one unit is greater the more emissions there are in the watercourse. We also assume that companies from the beginning (ie without treatment) emit the same amount each and that they have different marginal costs to reduce emissions. a) Explain with the help of a diagram why the situation without treatment is socio-economically inefficient. b) Show and explain how to achieve a socio-economically efficient amount of emissions with the help of a fee. c) Compare the fee regulation in task b) with a quantity regulation where both companies are expected to reduce emissions equally to reach the optimal level.d) Show and explain how a system with transferable emission rights should work. Relate to socio-economic efficiency and corporate profits. Compare with your result in b) and c).
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