In a cap and trade system, when allowances aregiven away for free, regulatedfirms can enjoy rents compared to whenallowances are auctioned.a. Explain why rent is generated.b. Does this mean that firms do not pay for theiremissions, and therefore they do not have theincentive to reduce emissions? Explain.c. Same distributional effects can be achieved withan emissions tax where the tax applies only toemissions beyond a certain level. How would thissystem work in terms of giving incentives tothe firms to reduce emissions? Discuss this withthe help of a MB and MC of abatement diagramwhere the emissions tax is set at where MB = MCand the tax-exempt amount of emissions isbetween the maximum and the efficient level ofabatement.

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In a cap and trade system, when allowances are given away for free, regulated firms can enjoy rents compared to when allowances are auctioned. a. Explain why rent is generated. b. Does this mean that firms do not pay for their emissions, and therefore they do not have the incentive to reduce emissions? Explain.

In a cap and trade system, when allowances are given away for free, regulated firms can enjoy rents compared to when allowances are auctioned. a. Explain why rent is generated. b. Does this mean that firms do not pay for their emissions, and therefore they do not have the incentive to reduce emissions? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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