A critically important criterion that must be considered in evaluating environmental policies is whether they provide strong incentives for people to find new ways to improve ambient environment. Below is a simple model economy of a single pollutant-emitting firm, which has a marginal abatement cost curve (MAC), to discuss the advantages and disadvantages of various policies. MAC₁ indicates the current MAC curve and MAC₂ and MAC₃ refer to the ones realized when the firm spends some resources (money) in an R&D effort to develop better technologies.

(a) Suppose that the authorities set an emission standard to reduce emissions from the uncontrolled level of 60 units to 48 units. What are the highest possible R&D investment costs to realize MAC₂ and MAC₃ respectively?

(b) Suppose, instead, the authorities institute an emission charge and the firm emits 48 units of pollutant with MAC₁ under the charge. What are the highest possible R&D investment costs to realize MAC₂ and MAC₃ respectively?

(c) Suppose, instead, the authorities institute a transferable emission permits program and the firm emits 48 units of pollutant with MAC₁ under the program. What are the highest possible R&D investment costs to realize MAC₂ and MAC₃ respectively?

(d) Some would argue that the incentives for R&D investment under command and control approach are weaker than the answers in part (a). Explain why this is the case by considering the expected behavior of the regulating authorities.