Two companies discharge wastewater into the same watercourse. Residents in the area would be willing to use the emissions. We assume I follow that the willingness to pay to take the emissions with one unit is greater the more emissions that are in the watercourse. We also assume that the companies from the beginning (yours without treatment) emit the same amount each and that they have different marginal costs to change the emissions.

a) Explain with the aid of a diagram why the situation without purification is socio-economically inefficient.

b) Show and explain how, with the help of a fee, a socio-economically efficient amount of emissions can be achieved.

c) Compare the fee regulation in task b) with a quantity regulation where both the company is expected to take the emissions equally to reach the optimal level.

d) Show and explain how a system of transferable allowances would work. Relate to socio-economic efficiency and corporate profits. Compare with your result in b) and c).