Suppose there are only two polluting firms, called A and B, with the following marginal abatement costs: 1602AA MACe=− and 100BB MACe=−, where A e represents firm A’s emissions in tons and B e represents firm B’s emissions in tons. Suppose the government wishes to ensure that the two firms together emit 60 tons of the pollutant and uses a Tradable Emission Permit (TEP) policy. Assume that each TEP allows its holder to emit 1 ton, and that the market for permits is perfectly competitive. a. Suppose the government initially distributes the total number of TEPs it issues equally between the two firms. The permits are distributed free of charge. Once trade in permits takes place, what will be the equilibrium in the market for TEPs (i.e. which firm will buy how many TEPs from the other, and at what price)? b. Briefly describe thre
Suppose there are only two polluting firms, called A and B, with the following marginal abatement costs: 1602AA MACe=− and 100BB MACe=−, where A e represents firm A’s emissions in tons and B e represents firm B’s emissions in tons. Suppose the government wishes to ensure that the two firms together emit 60 tons of the pollutant and uses a Tradable Emission Permit (TEP) policy. Assume that each TEP allows its holder to emit 1 ton, and that the market for permits is
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