Suppose that Marginal Abatement Cost (MAC)

MAC1 = 200 - E1

MAC2 = 300 - (3/2)E2

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

b) Is it 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 question (c) by using a carbon tax. What tax level will be required to do so?

e) Calculate the TAC for each firm when using the tax in question (d) by using a graph

f) Using the answers in question (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 question (c). From the viewpoint of society, is this policy preferable to carbon tax? What about for firms? and Why?