Show using the model from section 5.2 that, for an exogenous number of firms, freely distributed permits or subsidies can be used to implement the social optimum.

Data from section 5.2

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In this section we compare the performance of the policy instruments described in Chapter 3 using the more general model, and derive additional results specific to the output market. Our main objective is to show that, in the short run, all the earlier results continue to hold. In particular, an environmental regulator can obtain the socially optimal allocation of pollution using emission taxes, subsidies, auctioned permits, or freely distributed tradable permits. In later sections, we examine how this