2. Suppose that the firms in some industry emit an air pollutant that harms

people who are exposed to the pollutant. This situation is illustrated in the

graph below. Now suppose that a new cost-saving abatement technology is

widely adopted by the industry. Questions (2.1) through (2.4) ask you to

examine this change.

Aggregate MAC

x

Aggregate MD

ET

EU

Emissions

a. Which function in the graph will change with the new information, the

MAC or MD function? [1 point]

b. Which way will this function shift, up or down? [1 point]

c. As a result, does the efficient level of emissions increase, decrease or

stay the same? [1 point]/nd. Does the efficient emissions tax increase, decrease or stay the same? [1

point]