4.Two firms have the following marginal emissions benefit curves (where emissions are

measured in tons) :

Firm 1: MEB=10,000-5E

Firm 2: MEB=2000-E

a. How much would each firm emit if emissions are unregulated?

b. The government decides to limit each firm to emitting only 1100 tons of emissions each. What is the cost of compliance for each firm?

c. If instead the government had given each firm 1100 emissions permits (so 2200 permits across both firms) and allowed the two firms to trade, how much would each firm have emitted? What would the cost of compliance be for each firm?

d. The compliance cost for Firm 2 in part c is higher than the compliance cost for Firm 2 in part b. Does this mean that Firm 2 would prefer the firm-by-firm emissions limit in part b to the cap and trade policy in part c? Explain.

e. Now consider what would happen if the government imposed a tax on each ton of pollution that resulted in 2200 tons of emissions (exactly the same quantity of pollution across both firms as in part c). What tax would the government need to set? Would the cost to society of complying with the tax be higher or lower than in part c? Who would prefer the tax to the cap and trade policy?

Explain.