Question As part of its initiate to reach net zero emissions, the European Union runs an Emis- sions Trading Scheme to price carbon. To produce output within Europe, rms in certain polluting sectors are required to acquire emission permits. The idea is to account for the externality in the production process. However, since this scheme only applies to European rms, there is a concern over "carbon leakage" dirty production will expand outside of the EU, offsetting the European efforts to reduce global emissions. To address this issue, the EU has proposed using a Carbon Border Adjustment Mechanism (CBAM) see "Carbon Border Adjustment Mechanism: Questions and Answers" for background. This proposal has been criticized as a form of protectionism see "OECD seeks global plan for carbon prices to avoid trade wars". The purpose of this assignment is to analyse the issues surrounding the CBAM to understand whether it can be e'ective and evaluate the criticism that has been leveled at it. To keep the analysis manageable, consider a world with just two countries. Demand and supply conditions in each country are the same and represented by: Q}, = 100P Q; = P where the i superscript is an index that denotes country. These functions embody the private costs and benets for each location. 3. Now suppose rising sea levels erase Unicornia from the map and that Europe's new trading partner is Eporue (superscript R). Unlike Unicornia, production in Eporue is associated with exactly the same externality as in Europe. Solve for the equilibrium where neither location accounts for the externality and then solve for the efficient allocation. Using these results, calculate the dead weight loss in each location. (Suggested word allocation: 150 words)