Suppose you (each one of you in your group) own a power generation plant. The plants are not very similar. Some of you own plants that release more carbon dioxide than others. And some of you own plants with better technologies. An "organizer" (who could be one of you) that is concerned about carbon dioxide calls all of you for a meeting. They alert you that the total carbon dioxide currently produced by all of you is 100*N tons each year, where N is the number of people in your group. They explain that this level is not sustainable and will hurt everyone eventually. You agree that the level is high. After that, it is proposed that it will be good for everyone if each of you cut his emissions by 50 so that the total carbon dioxide produced will be only 50*N. How do you expect the discussion in the room to go? How do you feel about this proposal depending on your ability to cut your emissions and your current level of emissions? Use terms we learned in class such as "marginal cost of abatement".

 

b)Suppose now everyone agrees that the total emissions should be cut somehow to 50*N per year. The organizer then prints 50*N small cards. These cards work as permits to pollute and are labeled "carbon credit". Each credit permits its holder to emit 1 ton of carbon per year. Each of you is given 50 "carbon credits". The organizer mentions that each of you can sell their credits to someone else (for money) if they wish, or could buy more credits if they wish to have more than 50.

Do you expect trade will happen? Why? If you expect no trade to happen, also explain why.

Make sure to discuss the following: If there will be some buying and selling between the group, explain what would give you the incentive to buy or sell. What would be the price you are willing to pay if you are buying? What would be the price you are willing to accept if you are selling?

c)What is Coase theorem?

d)Explain in your words how the theorem is relevant to parts (a) and (b)