Assume that two power plants, Firm 1 and Firm 2, release sulfur dioxide (SO2) in Atlanta that exceeds the emissions standard. To meet the standard, 40 units of SO2 must be abated in total. The two firms face the following abatement costs:

MAC1 (Marginal Abatement Cost for Firm 1) = 10 + 0.5A1

MAC2 (Marginal Abatement Cost for Firm 2) = 5+ 2.5A2

The costs are measured in thousands of dollars.

With your knowledge of the class discussion on the Government Approach to Market Failure

(a) Determine how the abatement levels should be reallocated across the two firms to minimize costs.

(b) Show your results in a separate graph that is properly labeled.

(c) Draw a conclusion on how the abatement levels should be reallocated across the two firms to minimize costs.