3. In the graph below, a regulator imposes an emissions tax or an emissions market on the industry. The regulator knows the true marginal damage function (MD), but only has an

estimate of the industry's aggregate marginal abatement cost function (Estimated MAC). Given its estimate of the industry's MAC, the regulator either (1) sets an emissions tax tº expecting the industry to respond with Eº emissions, or (ii) puts Q° emissions permits in circulation expecting the permit price to be pº. However, the true aggregate marginal abatement cost function (True MAC) is higher than the regulator's estimated MAC. Use this graph to explain why a. emissions are inefficiently high under the regulator's emissions tax tº, and [2 points] b. emissions are inefficiently low under the regulator's emissions market with Q° emissions permits. [2 points] p² p¹ pº = tº Estimated MAC True MAC EºQ° E¹ E² = MD Emissions