Question

Consider two cities, each of which initially experiences 100 tons of pollution per day (50 tons from each polluting firm). City T imposes a pollution tax, resulting in an overall pollution reduction of 20 percent and a decrease in equilibrium employment. City U implements a uniform-reduction policy under which each firm cuts its pollution by 20 percent. Which city will experience a larger reduction in equilibrium employment? Illustrate.

Answer 1

Answer. Given the information in the question, the extent to which employment reduces in each country can not be said. However there are more chances that employment will reduce by more in city T. This is because a pllutiopo tax increase the cost of production. Thus, reducing output and employment. while, uniform reduction policy may not have direct affect over production cost.