Externalities

Quantity of                           Marginal Costs to Each Firm of Reducing Each Ton  of Pollution               Pollution Reduced (in Tons)

                                                                             

                                            Marginal Cost

                                                          Firm 1              Firm 2                                                          

                        1st                              25                      10

                        2nd                            55                      30

                        3rd                             95                      50

                        4th                           145                      90

                        5th                           205                    140

                        6th                           275                    200

                                                                                                                       

 

 

19) 

 

The table above shows the marginal cost of pollution reduction for two firms. If both firms are legally required to reduce pollution by three units each, what is the total cost of pollution abatement? 

 

19) 

 

______

20) 

 

The table above shows the marginal cost of pollution reduction for two firms. If the EPA wishes to have pollution reduced by six units, what is the most cost-effective way of doing this?

 

What  per-unit tax would achieve reducing pollution by 6 units at least cost?

 

Suppose each firm was given 3 permits each and each permit allowed the firm to emit 1 unit without penalties.  Would either of the firms be willing to sell a permit (or more) to the other firm?  How many would the selling form be willing to trade and at what price?