Two firms located along a river generate pollution. The marginal benefit (MB) that each firm earns (in dollars) as a function of the pollution that it generates (profits from an additional unit of pollution) is provided below, where x_i represents the units of pollution generated by firm i. MB1 = 40 – 2x1 MB2 = 10 – x_2/2 If the regulator places a tax on pollution of $6 per unit, what is the total quantity of pollution generated by the two firms? (15 points) The tax in part (b) is a cost-effective way of reducing pollution. What would you need to know about the damages associated with pollution to determine whether the tax is socially efficient (maximizes net social benefits)? (10 points)
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