Suppose there are two polluting factories, surrounded by two identical residential neighborhoods with no overlapping locations. The marginal damage curves are identical for the two neighborhoods, and they are given by M D1 = P and M D2 = P, where P is the level of pollution. The marginal benet curves for the factories, however, are different. The marginal benefit curve for the rst factory is MB1 = 8 P, while the curve for the second factory, which uses a cleaner production process, is given by M 32 = 4 P (both curves become zero once they hit they reach the horizontal axis). (a) (b) (C) (d) (e) (f) (g) 00 Draw two diagrams, one for each neighborhood to illustrate the MD and MB curves for each respective factory. In each diagram, clearly label both axes, both lines as well as the x- and y-intercepts of the MB lines. Identify the pollution levels chosen by each factory in the absence of government intervention. Find the level of social surplus (difference between total benefits and total damage) achieved in each neighborhood with no government intervention. Find the socially optimal pollution levels in the two neighborhoods. Explain intuitively why the optimal levels of pollution for both neighborhoods are different. Compute social surplus at the optimal pollution level in each neighborhood. Then, sum up the values across the two neighborhoods to get total welfare. This is the social welfare that would result from imposition of separate pollution standards on the two factories. Now suppose that the government institutes a common pollution standard, which applies to both neighborhoods. This standard restricts pollution from any factory to a maximum value P = 3. Under this standard, how much does each factory pollute? Compute the resulting level of social surplus in each neighborhood, and add the values to obtain the social welfare under a common pollution standard. Consider the social welfare from parts (b), (d) and (f) i.e. social welfare with no government intervention, with separate pollution standards and with a common pollution standard for both neighborhoods. How does the common standard compare to separate pollution standards, and to the case where the government does not intervene at all? Comment on the wisdom of using a common pollution standard