In a market of two consumers and two suppliers, the marginal benefit of the first consumer to own a product is: MB1=40-qc1, q is the quantity of the product. For the second consumer: MB2=40-2qc2. The marginal costs to produce the product are: MC1=qs1 for the first supplier and MC2=2qs2 for the second. The marginal benefits and marginal costs are all expressed in dollars.

In the case of CO2, if the marginal abatement costs for the Hong Kong supplier is constantly $2/kg CO2 and for the Paris supplier $0.5/kg CO2. Assuming that the pollution abatement costs are totally on the producers or polluters (i.e. we do not need to consider the changes of market demand and supply curves for the product in designing mitigation policies). Assuming that the only negative externality or environmental damage is the loss of a statistical life for every 1,000 tons of the pollutant. The value of one statistical life is $1 million, what level should an emission tax be set up to achieve efficiency? What are the emission levels of the two suppliers? If using an emission trading policy, how many emission permits should be allocated? If one quarter of the emission permits are allocated to the Hong Kong supplier and three quarters to the Paris supplier, how many permits will be traded?