2.

Suppose that there are only two polluters in a society.

If left uncontrolled, polluter 1 emits 75

units, and polluter 2 emits 25 units.

The polluters' marginal abatement costs are MAC1= 0.5a and MAC2= 2a. (Summing the two polluters' individual marginal abatement costs yields

aggregate marginal abatement costs of:

MACagg= 0.4aT) The damage caused by the polluters'

emissions is MD = 5 + eT

a.Find the efficient levels of total emissions (*Te) and total abatement (*Ta).

b.What is the total cost to society of the

*Te and *Ta you calculated in part a?

Calculate this cost andshade in the area(s) representing it on your graph from part a.Suppose that efficiency is policy makers' top priority.

They accept the efficient *Ta(from part a) as their target level of abatement.

c.Would imposing an emission standard equal to half of goal Te on each polluter (i.e., stde1 = goal Te, and stde2= goal Te) would be a cost-effective way to achieve the target?.

d.If policy makers opted instead to impose a tax on each unit of emission, at what level should

they set the tax in order to cost-effectively achieve goal Ta?

e.Calculate the total cost that each polluter would incur if the emission tax you identified in

part d were implemented (i.e., calculate TC

1and TC2 under the emission tax policy from part