Suppose that the non-recyclable rubbish generated by residential and commercial dwellings creates a negative externality: each kilogram of non-recyclable rubbish leads to damages evaluated at 50 pence. To regulate this externality, the government is considering 3 types of policies: (i) Imposing a fixed tax per kilogram of non-recyclable rubbish generated. (ii) Restricting the maximum amount of non-recyclable rubbish that a dwelling is allowed to generate to a fixed number of kilograms per dwelling. (iii) Creating a cap-and-trade system: each dwelling is allowed to generate a fixed number of kilograms of non-recyclable rubbish; if dwellings generate less rubbish than the maximum allowed, they can sell their "extra" kilograms to other dwellings; if dwellings generate more rubbish than the maximum allowed, they can buy "extra" kilograms from other dwellings. The government is seeking your advice as to which of these policies it should adopt.

3a) Suppose that the marginal cost of reducing their non-recyclable rubbish is higher for commercial dwellings than for residential dwellings. Explain which policies you would recommend the government to adopt in this case.

3b) Suppose that there is a lot of uncertainty over the marginal cost of reducing non-recyclable rubbish for commercial dwellings and residential dwellings. Explain which policies you would recommend the government to adopt in this case.