Consider an industry with two firms that emit a uniformly mixed air pollutant (e.g., carbon dioxide). The marginal abatement cost functions for Firm 1 and Firm 2 are: MAC1 = 100-e1 MAC2 = 100-4e2 Aggregate emissions for the industry are denoted as E = e1 + e2. [1] In an unregulated environment how many units of emissions does each firm emit? Firm 1’s unregulated level of emissions: Firm 2’s unregulated level of emissions: Total unregulated level of emissions: Suppose a regulator has a goal of reducing the total level of emissions from the amount from the amount you answered in [1] to 25 units. The regulator would like to achieve the goal of 25 units of total emissions in a cost-effective way. To do so it issues 25 permits, 10 are given to Firm 1 and 15 are given to Firm 2. A firm can only emit a unit of pollution if they have a permit for that unit, otherwise they must abate. After the permits are allocated, firms are allowed to buy or sell permits from each other in a market. [2] What price will the permits sell for in a competitive trading market? Hint: the price is determined where the supply of permits Ep = 25 equals the aggregate marginal abatement cost (AMAC). So, solve for AMAC and then plug in 25 for E to get the permit price. [3] How many permits does each firm buy and/or sell? Firm 1 buys _____ permits and sells _____ permits. Firm 2 buys _____ permits and sells _____ permits. [4] At their choice of emissions after trading permits, what is each firm’s total abatement cost? Firm 1’s Total Abatement Cost ___________ Firm 2’s Total Abatement Cost ___________ [5] Alternatively, what could the regulator choose for an emissions tax to achieve the goal of 25 units in a cost-effective manner?
Consider an industry with two firms that emit a uniformly mixed air pollutant (e.g., carbon dioxide).
The marginal abatement cost functions for Firm 1 and Firm 2 are:
MAC1 = 100-e1
MAC2 = 100-4e2
Aggregate emissions for the industry are denoted as E = e1 + e2.
[1] In an unregulated environment how many units of emissions does each firm emit?
Firm 1’s unregulated level of emissions:
Firm 2’s unregulated level of emissions:
Total unregulated level of emissions:
Suppose a regulator has a goal of reducing the total level of emissions from the amount from the amount you answered in [1] to 25 units. The regulator would like to achieve the goal of 25 units of total emissions in a cost-effective way. To do so it issues 25 permits, 10 are given to Firm 1 and 15 are given to Firm 2. A firm can only emit a unit of pollution if they have a permit for that unit, otherwise they must abate. After the permits are allocated, firms are allowed to buy or sell permits from each other in a market.
[2] What price will the permits sell for in a competitive trading market?
Hint: the price is determined where the supply of permits Ep = 25 equals the aggregate marginal abatement cost (AMAC). So, solve for AMAC and then plug in 25 for E to get the permit price.
[3] How many permits does each firm buy and/or sell?
Firm 1 buys _____ permits and sells _____ permits.
Firm 2 buys _____ permits and sells _____ permits.
[4] At their choice of emissions after trading permits, what is each firm’s total abatement cost?
Firm 1’s Total Abatement Cost ___________
Firm 2’s Total Abatement Cost ___________
[5] Alternatively, what could the regulator choose for an emissions tax to achieve the goal of 25 units in a cost-effective manner?
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[4] At their choice of emissions after trading permits, what is each firm’s total abatement cost?
Firm 1’s Total Abatement Cost ___________
Firm 2’s Total Abatement Cost ___________
[5] Alternatively, what could the regulator choose for an emissions tax to achieve the goal of 25 units in a cost-effective manner?
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