4. (9 points) Suppose there are two firms in the world with marginal costs of abatement...

   

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4. (9 points) Suppose there are two firms in the world with marginal costs of abatement given by: MCA = X MCB = 3X Each firm is emitting 3 tons of CO₂ initially, for a total of 6 tons. Suppose the marginal benefit curve is vertical (a threshold effect) at X = 4. This implies X*=4. a) (3 points) Suppose the government decides that the firms should split the burden, so each one will do 2 units of abatement. What is the total cost to firm A, firm B, and the two together? b) (3 points) What is the cheapest way to reach X* (i.e. how much abatement do A and B do)? Apply the equimarginal principle. c. At your answer to (b) what is the total cost of abatement for firm A? Firm B? The two together? 4. (9 points) Suppose there are two firms in the world with marginal costs of abatement given by: MCA = X MCB = 3X Each firm is emitting 3 tons of CO₂ initially, for a total of 6 tons. Suppose the marginal benefit curve is vertical (a threshold effect) at X = 4. This implies X*=4. a) (3 points) Suppose the government decides that the firms should split the burden, so each one will do 2 units of abatement. What is the total cost to firm A, firm B, and the two together? b) (3 points) What is the cheapest way to reach X* (i.e. how much abatement do A and B do)? Apply the equimarginal principle. c. At your answer to (b) what is the total cost of abatement for firm A? Firm B? The two together?