Suppose that if all countries acted collectively to reduce carbon emissions, the total benefits to all countries would exceed the costs. However, suppose that each country has a dominant strategy of not abating and that by pursuing their dominant strategy, all countries would end up worse off than if all countries chose to abate. In this scenario, which of the following would explain why each country has a dominant strategy of not abating? Each country finds that the cost of reducing its own carbon emissions is greater than the benefit it would receive from all countries' abatement. Each country finds that the cost of reducing its own carbon emissions is greater than the benefit it would receive from its own abatement. Each country's abatement would provide benefits only to itself and not to other countries. Each country chooses not to abate because it knows all other countries will not abate.

Two countries the US (U) and Fiji (F). Each country i E {U, F} can decide whether to impose a positive tax on the emissions of its polluting firms (t¡> 0) or to impose no tax (t; = 0). We can think of a representative firm that chooses whether to produce using a polluting technology (q = P) or a clean technology (q = C). The polluting technology generates profits of л(P) = 11. The clean technology generates profits of л(P) = 10 and doesn't have to pay tax. Assume that when the firm is indifferent between the two technologies, it chooses the clean technology. Imposing a tax of t = 1, profits of firms using polluting technology would equal profits of firms using clean technology. Let us now turn to the decisions that the governments would make if they were inde- pendently choosing whether to impose a tax or not. In the US, firms using the clean technology emit a total of 0 tonnes of CO2 emissions, while firms using the polluting technology emit a total of 900 tonnes of CO2 emissions. In…

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Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government wants to reduce total pollution in the area to 6 units, it can choose between the following two methods:   Available Methods to Reduce Pollution 1. The government sets pollution standards using regulation. 2. The government allocates tradable pollution permits.   Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The following table shows the cost each firm faces to eliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive. Firm Cost of Eliminating the... First Unit of Pollution Second Unit of Pollution Third Unit of Pollution (Dollars) (Dollars) (Dollars) Firm X 90 125 180…