Two electric utilities have different marginal abatement costs (MCA) for reducing sulfur dioxide emissions. They can each reduce these emissions with the following marginal (MCA) and total (TCA) abatement cost curves. Firm 1: TCA 1 = 2.5 (A1) 2 MCA 1 = 5A1 Firm 2: TCA 2 = 5 (A2 )2 MCA 2 = 10A2 Firm 1 would have an unconstrained emission level of E1Max =100 while Firm 2 is larger and would have unconstrained emissions of E2Max =150. A) The EPA believes that total emissions are excessive and wants to cut them from 250 tons to 130 tons. Calculate and graph the cost minimizing allocation of abatement activities for the two firms that will achieve the total desired abatement level A=120 tons. B) Suppose that the EPA decided to achieve the pollution reduction by requiring each firm to reduce their emissions by 60 tons: A1 = A2 =60 tons. Calculate and show on a graph, the efficiency loss compared to the cost minimizing allocation (that is, the increase in total abatement cost) that would occur. C) Rather than use uniform performance standards like in part B, the EPA decides to use an emissions tax to achieve the desired reduction of 120 tons. They set the tax per ton of sulfur dioxide emissions at $350/ton. Will this tax achieve their desired level of total emissions? At what level should the tax be set to get 120 tons of emission reduction? D) Rather than use performance standards or a tax, the EPA decides to establish a market in pollution rights. They set the supply of pollution permits at ES =130 (in order to achieve the desired reduction of 120 tons). Derive each firm's demand for pollution rights, the market demand curve, and the equilibrium price. How much would each firm pollute and how much would they abate? Draw a graph of the market equilibrium. E) The EPA conducts a study of the health benefits from reducing sulfur emissions and finds they are constant at $300/ton. How should this information on the MSB of abatement be used? How should the EPA adjust its desired level of pollution abatement?