Q.1, answer is B. In the absence of the utility being legally liable, the victims of pollution have an incentive to pay the utility to reduce pollution up to the point where the marginal benefit of the last ton of reduction is equal to the marginal cost. If the utility is legally liable, it has an incentive to pay the victims of pollution to allow it to pollute up to the same point. Therefore, property rights do not matter for the amount of pollution reduction because such rights do not change the marginal benefits and the marginal costs of pollution reduction. Two different approaches, but same result where MB = MC.

Q.2, this question assumes that Marginal cost of pollution reductions will not be changed. In this case, of course, we will choose the one who has lower Marginal Cost (Commonwealth) to reduce 20 million tons of pollution and sell 10 million tons of allowance to the other company. However, in reality, Marginal cost is keeping increasing when utilities increase their pollution reduction.

Q.3, Question is E. Because the cost of installing air scrubbers is higher than the market price of the emission allowance, it is better off buying allowances from the market.

Q.4, when there are 6 units of Dams along the river, the marginal social benefits are larger than marginal private benefits by $50, but Marginal social benefits is equal to Marginal social costs. While there are 5 units of Dams, the marginal social benefits are larger than marginal private costs by $50.

Q.5, the answer is A. Only A can support Kevin's point of view.