Exercise 9.1 Suppose there are two polluting factories, surrounded by identical residential neighborhoods. The marginal damage curves are identical for the two neighborhoods, and they are given by MDi -P and MD2 P, where P is the level of pollution. The marginal benefit curves for the factories, however, are different. The marginal benefit curve for the first factory is MB 8 - P, while the curve for the second factory, which uses a cleaner production process, is given by MB, 4-P (both curves become zero once they hit the horizontal axis. (a) Illustrate the curves for the two neighborhoods in two diagrams, and identify the pollution levels chosen by the firms in the absence of government intervention. Find the level of social surplus achieved in this case. (b) Find the socially optimal pollution levels in the two neighbor- hoods. Why do they differ? Compute social welfare in each neighbor- hood, and sum the values across the two neighborhoods to get total surplus. This is the surplus level that would result from imposition of separate pollution standards in the two neighborhoods.