Firms A and B produce 80 units of pollution each. The government wants to reduce pollution emissions. The marginal costs associated with pollution reductions are MCa = 50 +3Qa for firm A and MCb = 20 + 6Qb for firm B, where Qa and Qb are the quantities of pollution reduced by each firm. Society's marginal benefit from pollution reduction is given by MB = 590 - 3Qt, where Qt is total pollution reduction (Qa + Qb). The socially optimal amount of pollution reduction for each firm is Qb = 40 and Qa = 70. (a) Suppose we require each firm to reduce emissions by one half of the socially optimal amount of pollution reduction. Clearly explain why this would be inefficient. (b) Suppose instead that we give each firm the rights (permits) to generate one-half of the socially optimal amount of pollution and let them trade the permits. Clearly explain how this leads to an efficient outcome.
5.
Firms A and B produce 80 units of pollution each. The government wants to reduce pollution emissions. The marginal costs associated with pollution reductions are MCa = 50 +3Qa for firm A and MCb = 20 + 6Qb for firm B, where Qa and Qb are the quantities of pollution reduced by each firm. Society's marginal benefit from pollution reduction is given by MB = 590 - 3Qt, where Qt is total pollution reduction (Qa + Qb). The socially optimal amount of pollution reduction for each firm is Qb = 40 and Qa = 70.
(a) Suppose we require each firm to reduce emissions by one half of the socially optimal amount of pollution reduction. Clearly explain why this would be inefficient.
(b) Suppose instead that we give each firm the rights (permits) to generate one-half of the socially optimal amount of pollution and let them trade the permits. Clearly explain how this leads to an efficient outcome.
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