Suppose there are only two sources of SO2 emissions in Florida. Source 1 is a coal...

Suppose there are only two sources of SO2 emissions in Florida. Source 1 is a coal fired power plant and Source 2 is an oil refinery. Marginal control costs for the two firms are given by MCC1=10*q1 and MCC2=15*q2, where q1 and q2 represent the tons of pollution that each respective firm controls. Both sources currently emit 20 tons of sulfur dioxide. Florida's government decides that it wants to reduce SO2 pollution by 20 tons total.

Next, suppose the government decides to try out a emissions tax system. They still want to reduce emissions by 20 units. What should be the price of the per unit tax? (Assume government wants to achieve the cost effective pollution reduction.) Show your work!!

Expert Solution

At cost effective solution

MAC1 = MAC2

10q1 = 15q2

q1= 1.5*q2

As from total pollution reduction constraint :

q1+q2= 20

Put q1= 20-q2

20-q2= 1.5*q2

20= 2.5q2

q2= 20/2.5= 8

so optimal tax = equilbrium value of MAC

= 15*8

= $ 120

Rahul Sunny answered 2 years ago

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