1. Cap-and-trade (a) Suppose that the campuses of UCLA and USC each use energy q to produce ideas worth i(q) = pq ci 2 q 2 , where i = 1 indexes UCLA and i = 2 indexes USC. If p = 1, c1 = 1, and c2 = 4, what will q1 and q2 be if UCLA and USC each maximize the value of their ideas? (b) Environmentalists have learned that the total energy used by both campuses, q1 + q2, creates a negative externality, D(q1 + q2) = 1 2 (q1 + q2). What are the first-best levels, q FB 1 and q FB 2 ? (c) With your answer from (b), calculate the total first-best quantity, QFB = q FB 1 + q FB 2 . Suppose that we require UCLA and USC each to produce exactly QFB/2. Will this attain the first-best outcome? Explain. (d) Suppose we issue QFB/2 permits to UCLA and QFB/2 permits to USC, and allow them to trade. Each school cannot use more energy than they have permits. Calculate how many permits USC will sell to UCLA. Does this yield the first-best outcome