Two power plants are currently emitting 10,000 tonnes of pollution each.

Control costs for Plant 1 are given by: MCC(1) = 0.05Q

Control costs for Plant 2 are given by: MCC(2) = 0.04Q

where Q is the number of tonnes of pollution reduction.

Analyse the effects of the following policies in terms of:

i) control costs for each firm

ii) total control costs

iii) total pollution reduction

iv) government revenues (you will need to draw a diagram for each and include calculations for a) and b) below):

a) A regulation requiring each plant to reduce its pollution by 6,000 tonnes. (5 marks)

b) A pollution tax of $250 per tonne of pollution emitted