The diagram below shows the marginal costs of pollution abatement for two firms,Firm 1 and Firm 2.
FIGURE 17- 5
-Refer to Figure 17- 5.Suppose Firm 1 and Firm 2 are each abating Q3 units of pollution.If the government imposed an emissions tax of $40 per unit of emissions,

Question

The diagram below shows the marginal costs of pollution abatement for two firms,Firm 1 and Firm 2.
  FIGURE 17- 5
-Refer to Figure 17- 5.Suppose Firm 1 and Firm 2 are each abating Q3 units of pollution.If the government imposed an emissions tax of $40 per unit of emissions,

Quizplus · Accepted Answer

At Q3, the marginal cost of pollution abatement is the same for both firms. However, the emissions tax would shift the marginal cost curves upwards by $40. As a result, Firm 1, with a steeper marginal cost curve, would find it more expensive to continue abating at Q3 and would increase abatement beyond Q3. Firm 2, with a flatter marginal cost curve, would find it less expensive to continue abating at Q3 and would abate less than Q3. Therefore, the optimal outcome would be for each firm to abate at their respective points where their marginal cost of pollution abatement equals the emissions tax, resulting in Firm 1 increasing abatement and Firm 2 decreasing abatement, which is described by choice C.

The Diagram Below Shows the Marginal Costs of Pollution Abatement