Throughout this question, draw diagrams to help illustrate (wherever relevant). Suppose that MAC1 = 40 -0.5 E1, MAC2 = 40 - E2, and MD = E= E1 + E2.

(a) Using the equi-marginal principle, verify that the efficient level of emissions for each firm is E1=20 and E2=10. Show your work.

(b) Suppose a uniform emissions standard is set to achieve the aggregate level of emissions given in (a). That is, E1= E2 =15. Calculate the total abatement costs for each of the firms. Use a graph in your answer.

(c) Explain why this is not a cost effective way to reduce total emissions to 30.

(d) Now assume individual emissions standards are used to achieve the efficient level of aggregate emissions. What level of emissions will be set for each firm?

(e) What are the total abatement costs for each firm given the individual emissions standards in part (d)? Use a graph in your answer.

(f) What is the deadweight loss resulting from the uniform emissions standard?

(g) Suppose the government wants to reduce emissions to the total amounts found in (a). What tax level will be required to do so?

(h) Explain which of the three policies (carbon tax, individual standards and uniform standards) is preferable when the MAC curves are assumed to be known, as is the case above. Focus on efficiency and cost effectiveness (and the concept of dead weight loss), as well as enforceability.

(i) Suppose instead that the government does not know the MAC curves and sets a tax equal to $20 per ton. What are the consequences of this policy, in terms of emissions outcomes (compared to (a)) and total abatement costs (compared to (e))?

(j) Which policy is preferred when MAC curves are unknown: the tax in part (i) or a uniform standard in (b). Explain, based on abatement costs, level of emissions, and enforceability.