1. local pollutants
2. 

5. Local Pollutants (5 points) Assume there are two polluting firms in two different cities. In the business-as-usual outcome, Firm #1 would emit 20 units of pollution (e:=20) and Firm #2 would emit 20 units of pollution (ez 20). Additionally, assume the marginal abatement costs for Firm #1 and Firm #2 are given below: MACI (x1) = 0.5x1 & MAC1 (X2) 2x2 This pollutant is known to cause adverse health effects when in high concentrations. Since the firms are in different cities, assume the marginal social benefit of abatement differs across Firm #1 and Firm #2. In particular: MSBI (x1) =8 & MSB: (x2) =18 a) (1 point) In the optimal outcome, how much pollution will Firm #1 emit and how much pollution will Firm #2 emit?| b) (1 point) If each city decides to impose a local pollution tax, what would be the Pigouvian tax in each city? () (1 point) Suppose a cap-and-trade program is established between the two cities, and a total of 15 pollution permits are created. If each firm is given 7.5 of the tradable pollution permits, will the socially optimal outcome be achieved? d) (1 point) Calculate the total costs, total benefits and net benefits of abatement in each city, under the cap and trade system. Ignore emission fees. 2) (1 point) What if you he had no policy at all? Would the no-action scenario achieve lower or higher Net Benefits than the cap and trade policy