Classwork 11

Market for Pollution

Question 1

Firms A and B each produce 80 units of pollution. The federal government wants to reduce pollution levels. The marginal costs associated with pollution reduction are: \[ \begin{aligned} MC_A = 50 + 3Q_A \qquad\text{for firm A} \\ MC_B = 20 + 6Q_B \qquad\text{for firm B} \end{aligned} \]

where \(Q_A\) and \(Q_B\) are the quantities of pollution reduced by each firm. Society’s marginal benefit from pollution reduction is given by \[ MB = 590 – 3Q_{T} \]

where \(Q_{T} = Q_A + Q_B\) is the total reduction in pollution.

Part A

What is the socially optimal level of each firm’s pollution reduction?

Part B

How much total pollution is there in the social optimum?

Part C

Explain why it is inefficient to give each firm an equal number of pollution permits (if they are not allowed to trade them).

Part D

Explain how the social optimum can be achieved if firms are given equal numbers of pollution permits but are allowed to trade them.

Part E

Can the social optimum be achieved using a tax on pollution?