3: Tradeable emissions permits Assume an economy of two firms. The two firms pollute. Firm one has a marginal savings function of MS1(e1) = 5 1 2 e1 where e1 is the quantity of emissions from the firm. Firm two has a marginal savings function of MS2(e2) = 11e2. The aggregate marginal damage to all consumers is MD(E) = 1 3E, where E the total amount of emissions (E = e1 + e2). Note the similarity between this question and Q4 in Tutorial 4. 1. Suppose the government imposes an emissions trading scheme, with 15 permits in total, so that 15 = e1 + e2. Will the firms emit the efficient level of pollution? Calculate the efficient aggregate pollution level, and explain your answer using a diagram. 2. What changes do you recommend for this emissions trading scheme? Question 4: Tradeable permits: Open Access A single-species fishery is open access. Total harvest from the fishery initially increases as more boats join the fishery, but after a certain point the harvest declines because the fish stock becomes depleted, making it more difficult to find and catch fish. 1. Give an intuitive explanation for why too many boats will operate under the open access regime. 2. How would you design an Individual Transferable Quota to achieve the optimal outcome? 3. Explain why the efficient outcome could be achieved if the permit-holders are allowed to choose the total annual catch, rather than an external regulator