Question 2: Environmental regulation (in theory) Consider an industry consisting of two firms. For the first part of the question, assume that these firms behave competitively (i.e. as price takers). The marginal abatement cost curves (MACs) for each firm: MAC (e1) = 10-e1 MAC2(e2) = 12-0.5e2 (a) What is the unregulated level of emissions for each firm? (b) Suppose the environmental regulatory agency establishes an aggregate emissions level of 16 units. What is each firm's abatement costs if 16 permits are divided equally across these two firms (but the permits are not tradable). (c) Suppose instead that these permits are tradable. What is the market price for permits? How many permits does each firm buy or sell? What is each firm's total cost (abatement costs plus net permit costs or sales). (d) Now suppose the regulator auctions 16 permits (rather than allocating them for free to firms). What is the competitive auction price? What is each firm's total cost (abatement plus the cost of purchasing permits). (e) What tax rate should the government charge in order to achieve a total emissions level of 16? What is each firm's total cost (abatement plus tax liability). (f) Wait a minute. There are only two firms in this market! Comment briefly (no math required) on how the choice between policy scenarios introduced above might change if these two firms behave strategically versus competititvely