19. Suppose pollution is produced by two firms, one of which faces a higher marginal cost of pollution reduction at all levels than the other. Argue, using both a graph and a verbal discussion of the intuition, why a Pigouvean tax equal to the marginal damages is a more efficient way to achieve the socially optimal level of pollution reduction than quantity regulation (with the quantity of reduction split evenly between the two firms).

19. Suppose pollution is produced by two firms, one of which faces a higher marginal cost of pollution reduction at all levels than the other. Argue, using both a graph and a verbal discussion of the intuition, why a Pigouvean tax equal to the marginal damages is a more efficient way to achieve the socially optimal level of pollution reduction than quantity regulation (with the quantity of reduction split evenly between the two firms).

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 5PA

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