Determine the Cost Efficient Levels of Emissions Reduction
Two firms produce a pollutant called Q. The total cost of reducing emissions of Q are as follows for Firm 1 and Firm 2, respectively:
TC1=10+100Q1^{2}
TC2=20 + 50Q2^{2}.
This means that the marginal costs of reducing emissions of Q are as follows for Firm1 and Firm2, respectively:
MC1=200Q1
MC2=100Q2.
A. Suppose that a regulator has determined that total emissions of Q must be reduced by 21 units. Determine the cost efficient levels of emissions reduction that should be undertaken by Firm1 and Firm2. Remember that the equimarginal principle requires that marginal costs be equated across the two polluters for emissions reduction costs to be minimized.
B. Suppose that, instead of the cost efficient levels of emissions reduction, the regulator orders that emissions be reduced by 10.5 units for each firm (21 units total). How much more will this allocation of emissions reductions cost, compared to the cost efficient levels?
C. Your correct answer in A is the cost efficient allocation of emissions reduction. What else would you have to know in order to determine whether or not this is an efficient level of emissions reduction?