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 Q 3 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 Q 3 units of pollution.If the government imposed an emissions tax of $40 per unit of emissions,

Quizplus · Accepted Answer

If an emissions tax of $40 is imposed, each firm will now look to minimize their total cost which is the sum of their abatement cost and the tax they have to pay for each unit of emissions. 
At Q3 level of abatement, the abatement cost of Firm 1 and Firm 2 is $20 and $60 respectively. If the tax is $40 per unit of emissions, then each unit of emission will cost the firms $40. So, if Firm 1 continues to abate Q3 units of pollution, they will incur total cost of $100 while Firm 2 will incur total cost of $220. If Firm 1 decides to abate one more unit of pollution, they will incur additional abatement cost of $60 but will save $40 in taxes, hence their total cost becomes $120. Similarly, if Firm 2 decides to abate one less unit of pollution, they will save $40 in taxes but incur additional abatement cost of $80, hence their total cost becomes $260. Therefore, Firm 1 would increase abatement beyond Q3 and Firm 2 would abate less than Q3 to minimize their total cost.

The Diagram Below Shows the Marginal Costs of Pollution Abatement