Suppose that MAC1 = 200 - E1 MAC2 = 300 - (3/2)E2

a) Suppose a uniform emissions standard is set at E=100 for each firm. Calculate the compliance costs (TAC) for each of the firms. Use a graph.

b) How do you know that this is not an efficient way to achieve this reduction in aggregate emissions?

c) Calculate the efficient level of emissions for each firm if wish to reduce aggregate emissions to 200 , or E1+ E2 = 200 (as is the case under the uniform standard).

d) Suppose the government wants to reduce emissions to the level found in c) by using a carbon tax. What tax level will be required to do so? Show the work.

e) Calculate the TAC for each firm when using the tax in d). Use a graph to answer.

f) Using your answer in e) and a), what is the deadweight loss resulting from reducing emissions to 200 using the uniform emissions standard of E = 100 for each firm?

g) Suppose the government used individual emissions standards to reduce emissions to the values in c). From the viewpoint of society, is this policy preferable to a carbon tax? What about for firms? Why?

h) Suppose instead that the government does not know the MAC curves and sets a tax equal to $140 per ton of E. Given the true MAC curves above, what are the consequences of this policy, in terms of resulting emissions and total abatement costs (compared to answers in part e))? Use a graph to answer.