Answer both questions:

1.Consider a number of factories producing the same good that emit a pollutant called crud into a nearby lake.

(i) Explain how an economist would determine the socially optimal level of crud emissions? Use a diagram to illustrate your answer. (8 marks)

(ii) A local environmentalist claims that “the only good pollution is no pollution”. Using your diagram from part (i) explain why zero pollution is unlikely to be “good” from society’s perspective. (6 marks)

(iii) What would be the effect on the socially optimal level of pollution if the following events occurred? Illustrate the impact of each event with a separate diagram, showing the before and after outcomes:

a. A new factory production process increases the amount of crud per unit of output produced. (3 marks)

b. Water skiing on the lake becomes more popular. (3 marks)

2.Assess the relative strengths and weaknesses of using the following to regulate industrial pollution:

(i) conventional command and control regulation;

(ii) economic instruments such as emissions taxes or emissions trading schemes (ETS).