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Suppose the marginal benefit of CO2 emissions in Denver, Colorado is MBE = 64 - 4E and the marginal damage from emissions is MCE = 4E.

(a) Plot both the MBE and MCE functions. Clearly label the area corresponding to total damages from emissions. In addition, label the area that represents the deadweight loss from unregulated emissions.What is the level of emissions in the absence of regulation? 

(b) What is the efficient level of emissions, E∗ ?

(c) Suppose Denver implements a cap and trade program with a cap set at the E∗ that you identified in part (b). What is the total level of abatement that will occur?

(d) Clearly label or indicate the area corresponding to the total cost of abatement 

(e) What will be the equilibrium price of an emission permit?

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