1. Two power plants are currently emitting 8,000 tons of pollution each (for a total of 16,000 tons). Pollution reduction costs for Plant 1 are given by MCR1 = 0.02Q and for Plant 2 by MCR2 = 0.03Q, where Q represents the number of tons of pollution reduction.

a) Suppose a regulation is implemented that requires each plant to reduce its pollution by 5,000 tons. What will be each firm's pollution control costs? Draw two graphs (one for each firm)

b) Suppose instead that a pollution tax of $120 per ton of pollution emitted is implemented. How much will each firm now pay in pollution reduction costs (not considering taxes)? How do total pollution reduction costs with the tax compare to the total costs from part (a)?

c) Finally, suppose a tradable permit system is instituted in which permits for emissions of 6,000 tons of pollution are freely issued, 3,000 permits to each plant. What are the pollution reduction costs to each firm without trading? Use a graph similar to Figure 8.5 to support your answer, showing 10,000 tons of total pollution reduction

d) Using the same diagram you drew in part (c), explain which firm will sell permits (and how many), and which firm will buy permits. Assuming all permits sell for the same price, how much will each permit cost? Calculate each firm's net costs after trading, considering their pollution reduction costs and the costs (or revenues) from the permit sale.