Consider a situation where the true aggregate marginal abatement cost curve is given by: -C'(E)= a-b E, and the marginal damage function by D'(E)=d. E The regulator believes the marginal damage curve to be D'(E)=d̃. E with d̃ ∠ d. 

(a) Which total emission level will a benevolent but ill-informed regulator choose?

(b) Calculate the resulting welfare loss for a tax and a permit instrument. Show that this welfare loss is independent of instrument choice.