Without any regulations, firm X and firm Y each produce 900 tons of a pollutant per year. Regulators have discovered that the optimal level of this pollutant is a total of 1,000 tons of pollution each year. The figure below provides the marginal benefit curves of pollution for each firm.
Suppose that regulators limit each firm’s annual pollution to be 500 tons each. By how much will each firm reduce its emissions?
Noting that it is less expensive for firm X to reduce emissions, regulators decide to use an emissions tax instead of a strict environmental standard. Adjust the black line on the graph to show the optimal Pigouvian tax to reduce total emissions to 1,000 tons per year.
Under this tax, by how much will firm X reduce emissions
Under this tax, by much will firm X reduce emissions?
