1a) (3 marks) Define and demonstrate diagrammatically an efficient allocation of a fund pollutant (Q*) for a steel industry.

(b) (2 mark) Show that the total cost will not be minimized for any level of pollution other than Q*.

(c) (3 marks) Suppose you want to achieve a pre-determined level of emission reduction of 20 tons, and there are two steel firms with different abatement technologies so that MC1>MC2 (Note: steeper MC1 and flatter MC2). Demonstrate and analyze the cost effective allocation of emissions reduction of the two firms.

(d) (2 marks) Analyze that a properly designed emission charge/tax will produce the same efficient outcome as in part (c).