1. The following diagram shows a pollution source (which is a firm) with two marginal abatement schedules. The more efficient schedule would show the sources marginal costs of abatement if it were to invest in new technology. The current marginal abatement curve without investing is MAC1. Each of these questions can be answered with letters or in some cases, a simple phrase.

a. when the tax is imposed at t? Mark this level of emissions as E₁in the graph below. What are its total compliance costs? Add up the letters.

b. At the firms best choice of abatement, what is its marginal abatement cost?

c. Now suppose the firm is deciding whether to invest in the new abatement technology. Under the new marginal abatement cost schedule (MAC₂), how much will the firm emit? Mark this on the graph as E₂. What are its total compliance costs with the new technology? Add up the letters.

d. Which emissions is higherE₁ or E₂?

e. How much does the firm save in compliance costs if it invests in new technology?

f. How much does the firms marginal abatement cost change if it invests in the new technology?