1. Two large factories (MAC₁=7q₁; MAC₂=21q₂, where q means the amount of removed pollution) are operating in the same area, causing serious SO₂ emissions (80 and 100 units). The authorities would like to reduce the total pollution in the area by 40 units, and they are considering two policy solutions to achieve this goal:

• a norm requiring equal rest emissions
• tradable pollution permits that are auctioned to the companies

Please calculate and compare the financial effect of the two solutions

for the companies

for the society as a whole

The authorities have decided to use the tradable permits. What will happen if a third company now starts operation in the same area? (You do not need to make any calculations here, just describe the effect in 1-2 sentences.)

(You do not need to make a drawing for this exercise.)