**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)?

Marginal Abatement Cost of Firm X = 3ax Marginal Abatement Cost of Firm Y = ay

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-

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

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See attached image for marginal abatement cost table and question
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