The Diagram Below Shows the Marginal Costs of Pollution Abatement

question 58

Multiple Choice

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 Q3 units of pollution. If the government imposed an emissions tax of $40 per unit of emissions, and this tax rate was known to equal the social marginal cost of pollution, then we can predict with confidence that

• A) each firm would abate to the same level.
• B) each firm would abate to Q3.
• C) Firm 2 would increase abatement beyond Q3 and Firm 1 would abate less than Q3.
• D) the resulting level of pollution would be optimal.
• E) Firm 2 would increase its emissions and this would not be socially optimal.

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, typically expressed in years.

Bond Convexity

A measure of the curvature or the degree of the curve in the relationship between bond prices and bond yields, demonstrating how the duration of a bond changes as the interest rate changes.

Yield To Maturity

The total return anticipated on a bond if the bond is held until its maturity date, expressed as an annual rate.

Price Volatility

The rate at which the price of a security increases or decreases for a given set of returns, often measured by the standard deviation of historical returns.