Consider an industry with two firms: Firm 1 and Firm 2. Each firm initially emit

Question

Consider an industry with two firms: Firm 1 and Firm 2. Each firm initially emits 50 tons of air pollution as part of its production process. The government seeks to reduce emissions by a total of 50 tons and can do this using an emission standard, an emission tax, or a tradable emission allowance program. Marginal costs of controlling pollution for the firms are MCC1 = % Q1 MCC2 = 2 Q2 Where Q1 and Q2 is the number of tons of pollution control by Firm 1 and Firm 2, respectively. Using the information above, complete questions (1) - (7) below.

Explanation / Answer

Question 3

Firm 1 will reduce emission by 30 tons.

Marginal cost of controlling pollution for Firm 1 -

MC = 1/2 * Q1 = 1/2 * 30 = 15

Total cost of controlling pollution for Firm 1 -

TC = 30 * MC = 30 * 15 = 450

So,

TCC1 = $450

Firm 2 will reduce emission by 20 tons.

Marginal cost of controlling pollution for Firm 2 -

MC = 2Q2 = 2 * 20 = 40

Total cost of controlling pollution for Firm 2 -

TC = 20*MC = 20 * 40 = $800

So,

TCC2 = $800

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