The Fireyear and Goodstone rubber companies whose factories produce finished rubber and sell it in to...

The Fireyear and Goodstone rubber companies whose factories produce finished rubber and sell it in to the highly competitive world market at a fixed price of $60 per ton. The process of producing a ton of rubber produces a ton of air pollution that affects the environment. This 1:1 relationship between rubber output and pollution is fixed at both factories. Let the output of Fireyear and Goodstone be QF and QG, respectively.

The cost formulas for each firm are as follows:

Fireyear Total cost: C = 300 + 2(QF)^2

Fireyear Marginal cost is MC = 4QF

Goodstone Total cost: C = 500 + (QG)^2

Goodstone Marginal cost is MC = 2QG

Total pollution emissions generated are EF + EG = QF +QG. The marginal damage of pollution is constant per unit of E at $12

a) In the absence of of regulation, how much rubber would be produced by each firm? What is the profit for each firm?

b) The local government decides to impose a Pigouvian tax on pollution in the community. What is the proper amount of such a tax per unit of emissions? What are the post regulation outputs and profits of each firm?

c) Suppose instead of an emissions tax, the government observes the outcome in part (a) and decides to offer a subsidy to each firm for each unit of pollution abated. What is the efficient per unit amount of such a subsidy? Again calculate the levels of output and profit for each firm.

d) Compare the output and profits for the two firms in parts (a) through (c). Comment on the differences, if any, and the possibility of one or both firms dropping out of the market?

Expert Solution

Rahul Sunny answered 7 months ago

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