3 The market for pollution reduction Suppose that the social marginal benefit from reducing one unit of pollution is SMB - 975-50. R. Here, R is the quantity of pollution that is reduced and social marginal benefits are measured in dollars. Suppose that the private marginal cost of reducing a unit of pollution is PMC1 - 25 . R. Also, there are no external costs to reducing pollution. Thus, SMC1 = PMC1. (a) Draw the market for pollution reduction. (b) How much pollution would be reduced in the free market? (c) What is the efficient amount of pollution reduction? (d) What is the efficient quantity regulation? What about the efficient tax on pollution? (e) Now suppose it turns out to be more costly to reduce pollution than expected. The marginal cost of reducing pollution rises to PMC2 - SMC2 - 25 . R + 225. Draw the new market for pollution reduction. (f) What is the new efficient quantity of reduction? (g) Suppose the government imposes a quantity regulation based on the old efficient outcome (i.e., based on what was efficient under PMC1). Calculate the DWL from this policy. (h) Suppose the government imposes a tax based on the old efficient outcome. Calculate the DWL. (i) What is the DWL from the market (i.e., from no pollution reduction)? (j) The IPCC wants to limit global warming to less than 2 degrees Celsius. It believes that warming beyond 2 degrees can lead to increasingly harmful consequences. What does this imply about the marginal damage from carbon emissions. Specifically, is the marginal damage constant, increasing, or decreasing with the amount of carbon already in the atmosphere? Also, over time, will the social cost of carbon stay the same, increase, or decrease