3) Now suppose that Scenario 2 is true instead, and the government imposes the "fair" uniform regulation that requires each polluter to reduce emissions by 40% {no trading). What is the total cost of abatement in this case? Before calculating this, ask yourself what you expect to find! (1 point)

4) In Scenario 2, suppose instead that the government imposes a cap and trade system that reduces emissions by 40%. What is the total cost of abatement in this case? Before calculating this, ask yourself what you expect to find! (1 point)

5) In which Scenario are the gains from trade (i.e., the cost reduction from allowing Part II. 6. trading) larger? Scenario 1 or Scenario 2? (1 point)

Uncertainty and policy design The Weitzman model is our foundation for exploring the implications of uncertainty. This question asks you to explore some results related to policy intervention in the presence of uncertainty. A town council wishes to reduce the pollution in its drinking water. The town draws drinking water from a river that is polluted by upstream farms and factories. A water filtration company can clean the water (at the town's expense). The company's marginal cost of abatement is equal to 4g, where q is a measure of the abated pollution. The town knows the firm's abatement cost, but it does not know for sure the size of health bene?ts from abatement . Instead, they believe that the marginal health benefit per unit of abatement could be the ?ve following values, each with the assigned chance: $2 20% 4 20% MB: 7 10% (1) 12 30% [20 20%

6) If the town uses a price instrument (i.e., offers the water filtration company a subsidy per unit of abatement ), what price should it set? (1 point)

7) If the town uses a quantity instrument (i.e., mandates a given quantity of abatement and then pays the firm its true cost), what quantity of abatement should it choose? (1 point)

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