Question

Under what conditions would it be efficient for two firms to reduce pollution by the exact same amount?

Answer 1

While reducing the pollution, the firms look for it's cost-effectiveness as the cost of reducing the additional amount of pollution goes up as pollution is reduced towards zero.It is the marginal cost and if it rising then it means that total cost is also rising.The two firms can have very different marginal and total cost and one firm will end up paying more than the other.

The condition required for the two firms is that both firms will want to control pollution to the point where its marginal cost of pollution is just equal to the tax.Any marginal cost above the tax it is paying is not optimal for a firm.If both firms are required to reduce pollution by the same amount then it will result in unequal costs between them.

It has to redistributed in such a manner so that the same amount of pollution reduction will involve moving more pollution reduction from the higher cost firm to the lower cost firm until the marginal cost of both the firms is equal which would result in cost savings.