Suppose two companies emit a particular pollutant. The marginal cost of reducing business pollution 1 is MC1 = 400q1 while the corresponding marginal cost for business 2 is MC2 = 100q2 (where q1 and q2 are the quantities of pollutant emissions that the first and second companies reduce, respectively). Without government intervention, enterprise 1 generates 100 pollution units and enterprise 2 generates 80 pollution units. Cost-effective allocation of pollution reduction requires that MC1 = MC2: 400q1 = 100q2 4q1 = q2 Regulation requires that q1 + q2 = 50. Setting q2 = 4q1: q1 + 4q1 = 50 5q1 = 50 q1 = 10 (Amount of pollution reduction by company 1) q2 = 4q1 = 4 * 10 = 40 (Amount of pollution reduction by company 2) Calculate the pollutant emission charge that must be imposed in order to achieve a cost-effective result. What will be the tax burden of each business in this case?
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For company 1, the marginal cost of reducing pollution is MC1 = 400q1. Since q1 = 10 (as calculated earlier), the marginal cost for company 1 is 400 * 10 = 4000. For company 2, the marginal cost of reducing pollution is MC2 = 100q2. Since q2 = 40 (as calculated Show more…
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