Refer to the Figure above. If the damaging firm is emitting at the uncontrolled emissions level and is required to compensate damaged firms and individuals, the damaging firm has an incentive to
A) stop emissions entirely.
B) reduce emissions until total abatement costs are equal to total damages.
C) reduce emission to e*, where marginal damages are equal to marginal abatement costs.
D) stay at the current level of emissions (e1) and pay the damages.
Correct Answer:
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