Problem: Assume an economy of two firms and two consumers. The two firms pollute. Firm 1 has a marginal savings function of MS1(e) = 5-e where e is the quantity of emissions from the firm. Firm 2 has a marginal savings function of MS2(e) = 8-2e. Each of the two consumers has a marginal damage MD(e) = e, where e in this case is the total amount of emissions the consumer is exposed to.
1. Graph the firm-level and aggregate marginal savings functions
2. Graph the aggregate demand function
3. What is the optimal level of pollution, the appropriate Pigouvian fee, and the emissions from each firm?