In: Economics
Two firms are ordered by the federal government to reduce their pollution levels. Firm A's marginal costs associated with pollution reduction is MC = 20 + 4Q. Firm B's marginal costs associated with pollution reduction is MC = 10 + 8Q. The marginal benefit of pollution reduction is MB = 400 –40. a. What is the socially optimal level of each firm's pollution reduction? b. Compare the social efficiency of three possible outcomes: (1) require all firms to reduce pollu- tion by the same amount; (2) charge a commontax per unit of pollution; or (3) require all firms to reduce pollution by the sanme amount, but allow pollution permits to be bought and sold.
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