12.1 Assume an economy of two firms and two consumers. The two firms pollute. Firmone has a marginal savings function of MS₁(e) = 5 - e where e is the quantity of emissionsfrom the firm. Firm two has a marginal savings function of MS2(e) = 8 - 2e. Each of thetwo consumers has marginal damage MD(e):=e, where e in this case is the total amountof emissions the consumer is exposed to.a. Graph the firm-level and aggregate marginal savings functions.b. Graph the aggregate marginal damage function.c. What is the optimal level of pollution, the appropriate Pigovian fee, and emissions fromeach firm?

MS1(e) = 5 - e is the marginal savings function for Firm 1 .MS2(e) = 8 - 2e is the marginal…

Answered: 12.1 Assume an economy of two firms and…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 10PA

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