Electricity is often generated using coal fired plants. Unfortunately, coal burning produces SO2, which causes acid rain. Consider two countries that border each other to answer the following question. Country A’s SO2 emissions are known to negatively affect neighboring Country B through acid rain. However in private decision making, Country A does not acknowledge this and privately chooses an optimal level of nationwide abatement.

a) Assuming that society is comprised of these two countries, show this problem on a MAC/MD diagram. Show MAC, MD of Country A, MD of Country B, and aggregate MD curves.

b) On your graph, show the net gain to society that would be achieved by solving the problem.