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Anonymous answered this 11th Edition 11th Edition 19th Edit

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Step 1

MAC_1 = 18 - 2E1

MAC_2 = 12 - E_2

MED = .5 (E1 + E2)

Step 2

If the marginal cost of external damage equal the marginal

reduction costs, the optimum pollution level
takes place. MAC =
MED, hence.

For firm 1:

MAC_1 = MED

18-2E1 = 0.5( E1+E2)

2.5E1 = 18 - 0.5E2

E1 = 7.2-0.2E2 .......1

For firm 2:

MAC_2 = MED

12-E2 = 0.5( E1+E2)

1.5E2 = 12 - 0.5E1

E1 = 24-3E2 ......2

Step 3

Equating equations 1 and 2:

7.2-0.2E2 = 24-3E2

2.8E2 = 16.8

E2 = 6

Putting in equation 1:

E1= 7.2 - 0.2X6

E1 = 6

Total subsidy payment to the two firms should be = MED

(E1+E2)

Total subsidy = 0.5 * ( 6+6) * (6+6)

Total subsidy = 12

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