Environmental economics

Suppose that two polluting firms have marginal abatement costs given by the following equations: MAC1 = 50 - 5e1 and MAC2 = 40 -4e2 where en and ez are the emission levels of each firm respectively. The regulator's goal is to reduce total pollution from the two firms to 8 units. a) Suppose that the regulator requires that each firm reduce their emissions to 4 units (i.e. they use a uniform standard). Compute each firm's total abatement costs under this uniform standard and show graphically. (4 marks) b) Find the cost effective allocation of the 8 units of emissions to the two firms. Compute each firm's total abatement costs under the cost effective allocation and show graphically. (8 marks) c) Now, compare the results between parts a) and b). Which allocation of emissions (uniform or cost effective) does each firm prefer and why? Which allocation does society prefer and why? (4 marks)