Firms A and B each produce 50 units of pollution. The MC associated with pollution reduction are : MC = 50 + 3Q for firm A and + 6Q for firm B. (Q represents the quantity of pollution reduction by each firm). Social Marginal Benefit (SMB) from pollution reduction is: SMB = 590 + 3Q(t), where Q(t) is the total reduction in pollution.
1. What is the socially optimal level of each firm's pollution reduction?
2. How much total pollution occurs in the social optimum?
3. Say each firm is given a pollution quota of 25 units. Explain why it is inefficient, if no trade in pollution permits is allowed.
4. Show how social optimum can be achieved, if trade in pollution permits is allowed ( each firm was originally assigned a pollution quota of 25 units).