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Firms A and B each produce 80 units of pollution. The federal government wants to reduce pollution levels. The marginal costs associated with pollution reduction are MACA = 290-3eA for firm A and MACB = 500-6eB for firm B, where eA and eB are the quantities of pollution produced by each firm. Society's marginal cost from pollution is given by MCP = 140 + 3e, where e is total pollution.
(a) What is the socially optimal level of pollution from each firm?
(b) How much total pollution is there in the social optimum?
(c) If each firm is permitted to emit half of the optimum level of pollution, would this lead to an efficient outcome? Explain why or why not.
(d) Propose a policy that yields the efficient outcome if the regulator cannot tell which firm is A and which firm is B.
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