a. If the regulation mandates each firm to reduce an equal amount of nitrogen runoff, this policy may not result in the most cost-effective outcome because the marginal abatement costs for each firm are different. Firm 1 has a lower MAC of 1.5 compared to Firm 2's MAC of 2.5. Therefore, Firm 1 should contribute more to the reduction efforts as it is more cost-effective for them to do so, while Firm 2 should contribute less to achieve a more cost-efficient solution.
b. To determine the cost-effective allocation of nitrogen runoff reduction between the two firms that satisfies the overall reduction target, we need to equate the marginal abatement costs of both firms. Setting MAC1 equal to MAC2, we get 1.5A1 = 2.5A2. Solving for A1 in terms of A2, we find A1 = (5/3)A2. Since the total reduction target is 40 units, we can substitute A1 = (5/3)A2 into the total reduction equation to find the optimal allocation between the two firms.