ntroduction to Markets and the Economy Assignment 1 e, Starting from a position without trade (described In part d)), give an example in which trade makes each country better off. 6 marks] Question 5 Policies to Address Pollution (Total: 15 Marks). Suppose there are two pulp and paper firms operating on the Derwent River, call them A and B. Their production currently pollutes the river, harming fisheries downstream. Each firm currently emits 5 units each period. A study shows that total econamic surplus can be increased by reducing the total level of pollution by 6 units. The marginal cost to each of the twe firms of reducing their poliution is shown in the table below. The Tasmanian government has asked you to analysis the costs of three proposed policies: {1) direct regulation; (2) tex; (3) cap and trade. Marginal Cost of Reducing Pollution ($/unit) Unit Reduced FirmA | FirmB 1 10 5 2 15 10 3 20 35 4 25 50 5 30 75 a. Direct regulation (command-and-cantrol) involves requiring that each firm reduce their emissions by 3 units, What is the cost to each firm from this policy? What is the total cost from this policy? {2 marks} b. Design a tax policy that would achieve the target amount of pollution (reduce pollution by & units in total} at the least cost possible. What tax level would you impose? By how much does each firm reduce their pollution? What is the cost to each firm and what is the total cost? Provide an explanation for all your results. {5 marks} firm is required to c. Design a cap-and-trade system based on pollution permits. In this policy, a have a permit for each unit of pollution. For example, if a firm wants to produce 3 units of pollution it most have three permits. This policy must result in a 6 unit reduction in pallution at the lowest cost possible. How many permits will be offered under this scheme? What is the cost to each firm and what is the total cost? Provide an explanation for all your results. What is the price of each permit? What is the total cost of reducing pollution under this policy? {5 marks} BEA111 Introd uction to Markets and the Economy Assignment 1 d. Which of the three polices would you advise the Tasmanian government to implement? Be sure 1o support you conclusion with evidence from parts ajto ). {3 marks} Question 6 Dealing with Negative Externalities (Total: 5 Marks) You own a factory that emits pollution {(smoke) during production. Assume existing laws are such that you are not zllowed to emit smoke unless you get permission from the ity council in which your factory is located. The relevant total costs and benefits of emitting or filtering smaoke from your factory are shown in the table. Factory emits smoke Factory filters smoke surplus for yaur factory $200 [ 3160 Surplus for the city $350 $420 Suppose you are currently negotiating with the city. Is there a deal in which your factary is permitted to emit smoke? If so, provide the details of a deal wing your factory to emit smoke. If a deal cannot be reached, explain why. {5 marks)