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. There are two firms in a polluting industry. Their profit functions are: 111 = 5 + E Eff 2 112 = 10 + E2
. There are two firms in a polluting industry. Their profit functions are: 111 = 5 + E Eff 2 112 = 10 + E2 _ E3 Where E1 and 32 are their respective levels of emissions. Pollution has local damages; the marginal damage functions for emissions from each firm are: MID} = E1 MDg = E2 (a) Let's say that the regulator has all of this information and can use emission standard to mandate the socially-optimal level of emissions from each plant. What levels of emissions does the regulator mandate from each plant? (Hint: calculate the marginal benefit functions for both firms.) (b) Instead of an emission standard, the regulator can also use a cap-and-trade program. How many emission quotas should be created in this program
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