Suppose there are pulp and paper mills that release carbon dioxide emissions (CO₂) into air at their current production levels. Each firm currently emits 10 tons per year, thus emitting 20 tons total. Local authorities have decided they would like to reduce annual CO₂ pollution to 10 tons per year (thus a 10 ton reduction) via a cap-and-trade policy. The mills have different marginal abatement costs given by the following equations: MACX 3ax MACY = ay whereby ax and ay correspond to the marginal abatement quantities chosen by firms X and Y respectively. (a) Plot the marginal abatement functions for each firm on one overlapping graph that rep-

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
**Educational Text on Cap-and-Trade Policy with Pulp and Paper Mills**

**Context:**
Suppose there are pulp and paper mills that release carbon dioxide emissions (CO₂) into the air at their current production levels. Each firm currently emits 10 tons per year, thus emitting 20 tons total. Local authorities have decided they would like to reduce annual CO₂ pollution to 10 tons per year (thus a 10-ton reduction) via a cap-and-trade policy.

**Marginal Abatement Costs:**
The mills have different marginal abatement costs given by the following equations:

- \( MAC_X = 3a_X \)
- \( MAC_Y = a_Y \)

where \( a_X \) and \( a_Y \) correspond to the marginal abatement quantities chosen by firms X and Y respectively.

**Tasks:**

(a) **Plotting Marginal Abatement Functions:**
Plot the marginal abatement functions for each firm on one overlapping graph that represents all the possible combinations of achieving a 10-unit total abatement.

(b) **Trading Permits:**
If the regulators issue each firm 5 permits, what is the least firm Y would accept to sell one permit? What is the most firm X would be willing to pay to buy one permit? Given this information, do you expect firms would trade?

(c) **Permit Purchases:**
If the regulators issue each firm 5 permits, how many permits would X buy from Y? How do you know? *Note: it is possible to purchase fractions of permits, so they need not be in whole numbers.*

(d) **Impact of Lobbying:**
Suppose firm X has really good lobbyists and convinces the regulator to give all 10 permits to firm X and zero to firm Y. Would the firms still trade? After trading, how many permits would each firm have? How do you know? How does this compare to the outcome in part (c)?
Transcribed Image Text:**Educational Text on Cap-and-Trade Policy with Pulp and Paper Mills** **Context:** Suppose there are pulp and paper mills that release carbon dioxide emissions (CO₂) into the air at their current production levels. Each firm currently emits 10 tons per year, thus emitting 20 tons total. Local authorities have decided they would like to reduce annual CO₂ pollution to 10 tons per year (thus a 10-ton reduction) via a cap-and-trade policy. **Marginal Abatement Costs:** The mills have different marginal abatement costs given by the following equations: - \( MAC_X = 3a_X \) - \( MAC_Y = a_Y \) where \( a_X \) and \( a_Y \) correspond to the marginal abatement quantities chosen by firms X and Y respectively. **Tasks:** (a) **Plotting Marginal Abatement Functions:** Plot the marginal abatement functions for each firm on one overlapping graph that represents all the possible combinations of achieving a 10-unit total abatement. (b) **Trading Permits:** If the regulators issue each firm 5 permits, what is the least firm Y would accept to sell one permit? What is the most firm X would be willing to pay to buy one permit? Given this information, do you expect firms would trade? (c) **Permit Purchases:** If the regulators issue each firm 5 permits, how many permits would X buy from Y? How do you know? *Note: it is possible to purchase fractions of permits, so they need not be in whole numbers.* (d) **Impact of Lobbying:** Suppose firm X has really good lobbyists and convinces the regulator to give all 10 permits to firm X and zero to firm Y. Would the firms still trade? After trading, how many permits would each firm have? How do you know? How does this compare to the outcome in part (c)?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 1 images

Blurred answer
Knowledge Booster
Branding
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education