Consider 2 firms. Under unregulated private market conditions, firm A emits 20 units of pollution and firm B emits 20 units of pollution. If firms A and B are required to abate, however, they have marginal abatement cost curves that can be represented by: MACA = 5 Ap MACB = (5/3) Ap where Ap represents the number of pollution units abated. Now suppose the government wants to reduce the total amount of emissions by both A and B by 20 units (from 40 units total to 20 units total). It therefore allocates 10 tradeable emissions permits to each firm (under the initial allocation, each firm can pollute 10 units and must abate 10 units). 

The firms can trade amongst themselves for zero transactions costs. 

a. After the firms trade amongst themselves, how many units will firm A abate? 

b. After the firms trade amongst themselves, how many units will firm B abate? 

c. What will the price of permits be at the final equilibrium found in parts a & b?

Answer rating: 100% (QA)

a After the firms ... View the full answer