Question

Environmental Policy and Employment Consider two cities, each of which initially experiences 100 tons of pollution per day (50 tons from each polluting firm). City T imposes a pollution tax, resulting in an overall pollution reduction of 20 percent and a decrease in equilibrium employment. City U implements a uniform-reduction policy under which each firm cuts it's pollution by 20 percent. Which city will experience a larger reduction in equilibrium employment? Illustrate.

Answer 1

Since City T just produces pollution tax overall on all firms it can average out some firms or in other words soke firms pay smaller tax amounts and some pay largwr tax amounts totalling an average of 20% and thus equilibrium unemployment reduction is lower.

In contrary City U implement 20%tax on all firms irrespective of size and thus each firm will ensure equilibrium unemployment reduction which will be much larger than City T as all firms are treated equally and unemployment will be commensurate.