1. Price of steel p1p1 p2p2 0Q2Q2 Q1Q1 Q STEEL D = PMB = SMB S=PMC SMC = PMC + MD MD

2. Q CIGARETTES Price of cigarettes 0Q2Q2 D=PMB Q1Q1 p1p1 S=PMC=SMC SMB=PMB-MD MD p2p2

3. Q Price 0Q2Q2 D = PMB = SMB Q1Q1 p1p1 S = PMC SMC = PMC - EMB EMB p2p2

4. Q STEEL Price of steel 0Q2Q2 D = PMB SMB Q1Q1 S = PMC SMC = PMC + MD MD p2p2 12

5. Q STEEL Price of steel 0Q2Q2 D=PMB=SMB Q1Q1 S = PMC SMC = PMC + MD MD p2p2

7. Socially efficient frontier (i.e. social welfare is maximized). a b c d e f Utility

8. Q STEEL Price of steel 0Q2Q2 D = PMB = SMB Q1Q1 p1p1 S=PMC SMC=PMC+MD p2p2 S=PMC+tax

9. Q R&D Price of R&D 0Q2Q2 D = PMB = SMB Q1Q1 p1p1 S = PMC SMC=PMC-EMB p2p2 S = PMC – Sub

10. QRQR PRPR 0 MD = SMB R*R* S=PMC=SMC R Full More pollution More reduction $100

11. QRQR PRPR 0 MD=SMB R*R* PMC A + PMC B = SMC PMC B PMC A PMC B PMC A R*/2RARA RBRB $100

12. QRQR PRPR 0 MD = SMB R1R1 PMC 1 R Full PMC 2 R3R3 R2R2

13. QRQR PRPR 0 MD = SMB R1R1 PMC 1 R Full PMC 2 R3R3 R2R2