Consider a stylized two period model with banking The aggregate abatement cost function in period t is given by C(E) (a t be) 2 2b with a 1 a 2 is D(E) dE 2 2 (a) Determine the optimal emission quantities for both periods without banking (b) Assume that, starting from these optimal non banking perm...

a To find the optimal emission quantity for each period without banking we need to minimize the total cost function which includes the abatement cost and the damage cost subject to the constraint that ...

Consider a stylized two-period model with banking. The aggregate abatement cost function in period t is given

Question:

Consider a stylized two-period model with banking. The aggregate abatement cost function in period t is given by C(E)= (a_t−be)²/2b with a₁< a₂ is D(E)=dE²/2.

(a) Determine the optimal emission quantities for both periods without banking.

(b) Assume that, starting from these optimal non-banking permit quantities, banking is allowed. Calculate how many permits will be banked and determine the resulting welfare loss.

(c) Determine the second-best optimal amount of permits when banking is allowed.

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