Question 7 -50 marks (2-5 sentences + calculations per policy per section) Suppose there are two firms, A and B, that each currently release 4 tonnes of C02 emissions per week resulting in 8 tonnes of CO2 emissions per week. A study shows that total economic surplus can be increased by reducing the total level of emissions by 4 tonnes of C02 emissions per week. The cost to each of the two firms of reducing their emissions is shown in the table below. tonnes of CO. Total Cost Total Cost to removed per to Firm A Firm B week O 50 SO $10 $25 $25 $70 $45 $135 06$ 5220 The government has proposed three policy options to reduce the total level of emissions by 4 tonnes of CO2 emissions per week. a. Introduce laws requiring all firms to reduce their CO2 emissions by 2 tonnes per week. b. Introduce a carbon tax of $30 per tonne of CO2 emissions. C. The government will issue each firm with two permits. Each permit a firm holds allows it to emit 1 tonne of CO2 emissions per week. If a firm does not hold enough permits it must reduce its CO2 emissions. Firms can trade the permits with one another. Explain and evaluate each of the three policies. In particular i. Explain how each policy will work to reduce pollution. ii. How much each policy will cost each firm and in total, less any government revenue. iii. How successful each policy would be if the costs of removing each tonne of CO2 per week twice as high as what was initially thought. Hints You may want to convert each firm's Total Cost of reducing COz into the Marginal Costs of reducing COz so that you can determine how they will react to policy b and c. A carbon tax gives will introduce a benefit for firms when reducing pollution. The cost to a firm of selling one of its permits is that it must pay to reduce COz emissions by an additional tome. The benefit to a firm of buying an additional permit is that it doesn't have to pay to reduce CO2 emissions on the last tonne of COz it emitted