(a) Suppose that the two countries do not cooperate to determine how much they will each emit. Find each countrys best response function that describes the level of emissions each will choose, given what the other country is doing.

(b) Find the Nash equilibrium.

(c) Suppose instead that the countries cooperate to decide on their emissions. Show that, if theyre cost-effective, they will allocate emissions according to EN = ES.

(d) Find the cooperative allocation (the global optimal) of emissions according. How does it differ from what you found to be the Nash equilibrium? Explain.

Question 2 (20 points) : Consider a world with two countries, North and South. Each country emits methane, and methane damages depend on the total amount emitted by both counties. To abate, each country has to pay some abatement costs. Private damages and costs are described as follows: MDN MDs = 3(En + Es) MACN = 1402EN ; MACs 140 2Es Question 2 (20 points) : Consider a world with two countries, North and South. Each country emits methane, and methane damages depend on the total amount emitted by both counties. To abate, each country has to pay some abatement costs. Private damages and costs are described as follows: MDN MDs = 3(En + Es) MACN = 1402EN ; MACs 140 2Es