Question

here are three industrial firms in Happy Valley: Firm A Pollution Level = 70 units Cost to Reduce Pollution = $20 / Unit Firm B Pollution Level = 80 units Cost to Reduce Pollution = $25 / Unit Firm C Pollution Level = 50 units Cost to Reduce Pollution = $10 / Unit The government is considering options to reduce the pollution level to 90 total units. Suppose they decide to impose a 30 unit cap per firm. What would the total cost of the pollution cap be?Suppose the government decides to impose a pollution tax of $21 per unit. This tax will reduce the overall level of pollution to how many units?How much tax revenue would a $21 per unit pollution tax generate?

Answer 1

Solution 1. Suppose they decide to impose a 30 unit cap per firm, each firm's pollution level will be 30 units. Firm A will reduce pollution 40 units. The cost of pollution reduction $20 * 40 $800 Firm B will reduce pollution 50 units. The cost of pollution reduction = $25 * 50 = $1250 Firm C will reduce pollution 20 units. The cost of pollution reduction-$10 * 20 = $200 So, total cost of pollution reduction $800 $1250+ $200 $2250 2. Suppose the government decides to impose a pollution tax of $21 per unit. Firm A and C's pollution reduction cost ($20 and $10 respectively) is less than the tax amount ($21). So, Firm A and C will reduce its pollution level fully and Firm B will not reduce any pollution because pollution reduction cost is more than the tax amount (S21). So, the overall pollution level reduction 70+50-120 units. 3. A $21 per unit pollution tax generate a tax revenue of $1680 ti.e. $21 80 $1680)