andrew asked in Social ScienceEconomics · 3 weeks ago

Help with Economics homework problem?

6. Imagine that Hawk Inc. and UHart Corp. are two firms that each produce 20 units of smog pollution respectively such that there is 40 units total in the market. Based on some scientific studies, the Connecticut states government has decided it needs to intervene to reduce the total market pollution to 30 units total. The marginal cost of reduction for each firm is given by:

Hawk Inc. Marginal Cost of Reducing = 60 - 3Q

UHart Corp. Marginal Cost of Reducing = 20 - Q

Where Q is the units of smog pollution.

Say you're asked to determine what the optimal standard for each firm should be

What should the standard be?

What is the total cost to society if you impose that?

Now say the CT state government is interested in trying a cap and trade setup and they want you to predict how much each firm will reduce.

How many units will Hawk Inc. reduce?

How many units will UHart Corp. reduce?

What is the total cost to society under the cap and trade?

Which solution should you suggest? Intuitively explain why this option is your choice.

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