2. (40 pts.) Two very different commercial sectors produce a common airborne pollutant located intwo different

geographic regions. One has marginal benefits of pollution of 1000-2e1 while theother has marginal benefits of 800-e2.

a. (10 pts.) Write the equation for the total demand for emissions across both sectors (becareful, and remember lessons learned earlier in the class!). Does one sector haveuniformly lower marginal abatement costs than the other? What is the total amount ofemissions in the absence of regulation?

b. (10 pts.) A cap and trade program is created with an initial allocation of 1000 permits.After trading occurs, what will be the market price of a unit of quota? How much willeach sector emit?

c. (10 pts.) Assuming that the initial allocation of quota was proportional to the historicalshares of pollution in the previously unregulated market, who is a buyer and a seller inpart b and how much quota changes hands?

d. (10 pts.) It is later found that the marginal damage function from emissions isMD=(e1+e2)=E. How does the efficient level of emissions compare to the level achievedunder the cap and trade policy above? Graphically, depict the net loss to society (thedeadweight loss in econ-speak) from over/under abatement of pollution.

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