1. Consider two popular nightclubs in Pawnee, called the Snakehole Lounge and the Bulge. Unfortunately, both clubs cause noise pollution. Fortunately, there is a technology that the clubs can adopt to help reduce the noise pollution (sound absorbing panels). The cost of adopting this technology is different for each club. For the Snakehole Lounge, the marginal cost of reducing noise pol- lution is 10. On the other hand, for Bulge, this cost is 5. In essence the marginal cost of noise reduction for both firms is constant. Both nightclubs produce 15 units of noise pollution. Suppose that the social marginal benefit of noise reduction is described by the following linear function 30 – (25 + ZA) where zs and zg are the total reduction of the Snakehole Lounge and the Bulge respectively a. Please use the model of pollution reduction to draw a graph indicat- ing the social marginal benefit, the social marginal cost, and the private marginal benefit of noise reduction for the nightclubs. [5 points] b. What is the socially optimal amount of reduction for the Snakehole Lounge and the Bulge? [5 points] Leslie Knope at the Parks and Recreation Department of Pawnee is consider- ing whether to impose taxes or quantity restrictions to curb the noise pollution of their environment. The taxes, (Ts, TB) , would be Pigouvian taxes on the marginal unit of noise that each club emits. The quantity restriction, (zs, 28) . would be a lower bound on the amount of noise reduction for each club. For example, the Snakehole Lounge must reduce noise pollution by at least 25. c. What are the optimal taxes Ts and 7g to achieve the social optimum? [3 points] d. What are the optimal quantity restrictions 2s and Zg to achieve the social optimum? [3 points] e. Do optimal Pigouvian policies achieve the same noise reduction as the optimal quantity restrictions in this setting? Please explain why in one sentence. [4 points] Suppose Leslie Knope knows that one of the clubs has cost 10 and the other has 5, but she does not know which club has the high cost and which one has the low cost. f. Propose a Pigouvian tax schedule that implements the optimum. [4 points] g. Can quantity restrictions implement the optimum in this case? Please explain why or why not. [5 points] Suppose Ron Swanson suggests to Leslie Knope that she should consider the trading of noise emission permits. Each nightclub is given 5 tradable noise unit of noise. emission permits. In essence, owning 1 permit allows the nightclub to emit 1 h. After trading, how many permits do each nightclub have? Briefly explain your answer and compare the outcome to the social optimum.

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