Answered: Figure 3 shows the abatement cost…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Figure 3 shows the abatement cost curves of a high-cost side of an industry (MC1) and the low-cost side of the industry (MC2). Abatement runs from left to right; emissions from right to left, as shown. Given this information, answer the following questions:

1. Suppose now that a tradable permit system is imposed in which es permits are given to each firm, and the permits can be traded. Trades are conducted and the permit price settles at the “Market Price of Permits”.What is the amount of pollution the high-cost (MC1) side of the industry abates in the new equilibrium after trading (is it as, al, 0, or ah)?

2. What is the amount of pollution the low-cost (MC2) side of the industry abates in the new equilibrium after trading? Is it al, 0, as, or ah?

3. What is the cost savings from trading for the high-cost (MC1) side of the industry? Is it K, F+G+H+I, H+I+K, or F+G+K?

4. What is the amount paid for permits for the high-cost (MC1) side of the industry? Is it F+G+H+I, G+H+K, G+H+I or F+G+K?

5. What is the net-gain from trading for the high-cost (MC1) side of the industry? Is it G+H, G, F+G, or F?

6. What is the additional cost from trading for the low-cost (MC2) side of the industry? Is it H+I+K, F+G+H+I, K, or F+G+K?

7. What is the amount received for permits for the low-cost (MC2) side of the industry? Is it J, K+I, J+K, or J+G+F?

8. What is the net-gain from trading for the low-cost (MC2) side of the industry? Is it J, J+G+F, J+K, or K+I?

9. What is the total efficiency gain from trading, relative to the performance standard? Is it F+J, J+H, F+G, or F+G+J?

**Figure 3: Marginal Cost and Market Price of Permits**

This diagram illustrates the relationship between marginal costs and the market price of permits within an economic framework.

- **Axes and Labels:**
- The horizontal axis measures the allocation of permits, extending from 0 to \( aT \).
- The vertical axis represents the marginal cost, with lines labeled \( MC_1 \) and \( MC_2 \).

- **Curves and Lines:**
- **\( MC_1 \) Line:** The upward-sloping line represents the initial marginal cost.
- **\( MC_2 \) Line:** Another upward-sloping line, representing a different marginal cost scenario.
- **Market Price of Permits Line:** A vertical line intersecting the horizontal axis at the point labeled 'Market Price of Permits'.

- **Regions and Areas:**
- **Regions A, B, C, D, E:** Situated between \( MC_1 \) and \( MC_2 \), representing various cost implications upon allocation.
- **Region F:** Above \( MC_1 \).
- **Regions G, H, I, J, K:** Found between and adjacent the lines \( MC_1 \) and the market price line, showcasing the economic implications within this setup.

- **Horizontal Segments:**
- **\( a1 \), \( as \), \( ah \):** Phases of allocation depicted with arrows pointing left or right toward the total \( aT \).
- **\( eT \), \( es \):** Indicating specific economic thresholds or targets in the permit allocation scenario.

This visual serves as an educational tool for analyzing cost differences and the economic impacts of varying market price allocations in carbon trading or cap-and-trade systems.

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