Use a software package such as Matlab or Mathematica to program the example described in section 7.3.

(a) Assume the environmental regulator ignores the impact on the labor market and sets an emission standard according to the Pigouvian rule. Determine the second-best optimal labor tax and all other endogenous variables. How big is the MIE in this case?
For the next two parts, assume that the polluting good and leisure are complements by selecting a negative value for η (e.g. η=−0.4).

(b) Assume no emission taxation is possible and therefore no revenues are collected from emission taxes. Determine the second-best optimal combination of the emission standard and the labor tax.

(c) Assume now that an emission tax is possible. Determine the second-best optimal combination of the emission and the labor tax.

(d) Try to find parameter combinations where either MIEMRE>0 hold.

Data from section 7.3

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The theoretical results derived in the previous two sections can be challenging to appreciate in the abstract. To complement our general derivations, we present in this section an extended example using specific functional forms, which is designed to illustrate the mechanisms leading to the interaction and revenue