Question One In the diagram below, we described how a policymaker representing a uniform group of identical citizens chooses the optimal amount of abatement. 100 II The ideal policymakefs E, indifference curves in Slope: MRS E g E 62 VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV 0 ,2, ......................................................... \"6 E E r 'hl l r EISI E ran Ier 0 Shape: HRT E with zero . . abatement > 450 l 500 Abatement costs . 50 billion Consumption of goods and services (billions 6) 1. On a new feasible set and frontier, draw the indifference curves of the policymaker if she were to represent two different groups of citizens (again, we assume that all citizens in each group are identical, and the marginal utility of consumption and environmental quality are both constant). In the rst group, A, citizens care more about environmental quality than consumption, and in the other group, B, citizens care more about consumption of goods and services. Explain why the optimal level of abatement costs will differ across groups. (8) What are the main simplicationsfassumptions in the model that could be problematic in addressingthe climate change and why? (4) In reality, there is uncertainty about how costly abatement of environmental damage will be. Assume a consultancy gives you estimates that are now more cost effective than the ones we started off with in question one. On a new diagram, draw the feasible consumption frontier based on an optimistic assessment of the costs of abatement. Be sure to explain what it is about the frontier that shows that the cost estimates are optimistic or cost effective. (4) Now draw the feasible consumption frontier based on a pessimistic assessment of the costs of abatement on the same diagram. (3) By adding the policy makers indifference curves to your diagram in each case (assuming all citizens are identical), show how actual environmental quality chosen by the policymaker will differ, even if preferences are the same, depending on whether costs of abatement are assessed optimistically or pessimistically. In other words, add the ideal policy maker's indifference curves and compare the two outcomes. (6)