2. You're a policy analyst for the Pie-in-the-Sky Think Tank in Washington. A prominent
politician has asked you to determine what the efficient level of emissions would be for
the electricity industry in the United States to cease its negative impact on climate
change. Through some brilliant analysis, you've determined that the Marginal Emissions
Damages from electricity CO2 emissions are:
MED 10+0.1E
and the marginal emissions benefits to the industry are estimated to be:
MEB 125-0.2E
where E = Million tons of CO2 emissions per year, and MEB/MED are dollars per ton.


a. What is the efficient level of emissions, and the MED at that level?



b. Suppose the government wanted to regulate this market using a price-based
instrument. What is the efficient level of a tax on emissions?


c. What if the government wanted to regulate this market using a quantity-based
instrument? What is the appropriate level of an emission cap?



d. What is the efficiency difference between a price-based and quantity-based approach?