In the 1990s, the leader of Germany’s Social Democratic Party, Oscar LaFontaine, suggested a type of environmental regulation combining emission taxes with a minimum allowable emission standard. Specifically, each firm would be allowed to pollute an amount E̅ without paying the tax. All units exceeding E̅ would be subject to taxation.

(a) Determine the firm’s objective function.

(b) Explain why this system is inefficient in general and does not provide incentives for least-cost pollution reduction. Under what conditions will this system be efficient?