There are two consumers and two suppliers in a market, the marginal benefit of the 1^st consumer to get a product is MB₁=80-Q_c1, Q is the product's quantity. For the 2^nd consumer MB₂=80-4×q_c2. The marginal costs to generate the product are MC₁=q_s1 for the 1^st supplier and MC₂=2×q_s2 for the 2^nd. The MB and MC are all expressed in dollars.

(a) Pollutants are emitted during the production process, and the emission per unit product is 16 kg. Assume that the only negative externality or environmental damage is the statistical life loss per 2,000 tons of pollutants. The value of a statistical life is 2 million US dollars. So, what is the monetary value of the environmental damage caused by one unit of product? In equilibrium, what is the price and quantity of the product to achieve the social optimum?

(b)The first and second suppliers are located in New York and London. Assume that there are no transaction costs. If the pollutant is solid waste, compare the efficiency of the following two policies: emission standards and emissions trading. What if the pollutant is NO₂?

(c) In the case of NO₂, if the MAC(marginal abatement costs) for the London supplier is constantly $4/kg NO₂ and for the Paris supplier $1/kg NO₂. It is assumed that the cost of reducing pollution is entirely on the producer or polluter (that is, we do not need to consider the market demand and supply curve changes of the product when designing mitigation policies). According to the marginal damage assumption in (a), in order to achieve efficiency, how much emissions tax should be established? What are the emission levels of the two suppliers? If an emissions trading policy is used, how many emission permits should be allocated? If one-quarter of the emission permits are allocated to suppliers in London and three-quarters to suppliers in New York, how many permits will be traded?

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a The monetary value of the environmental damage caused by one unit of product can be calculated as follows Environmental Damage Value of Statistical ... View the full answer