Extend the model of this chapter by assuming that there are several firms with (possibly asymmetric) cost functions with increasing marginal costs. Assume first that emissions are regulated by a cap and trade system with freely allocated emission permits.

(a) Write down the equilibrium conditions for a given emission cap and labor tax.

(b) Compute the comparative static effects with respect to the emission cap and the labor tax on all endogenous variables, including the price for emission permits.

(c) Determine the second-best optimal combination of the emission cap and the labor tax.

(d) Assume now that an emission tax is possible. Determine the second-best optimal combination of the emission and the labor tax.