The recent debate about climate change has highlighted the need to reduce carbon emissions. Some countries have chosen to do this by creating regulations that mean that all firms must reduce emissions by the same amount. The cost to each of two firms (A and B) of reducing their emissions is shown in the table below. Use this data to help you explain how a given level of emission reduction (say 6 units) can be better achieved using a market-based incentive than using direct regulation. Include a diagram in your answer.

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Marginal Cost of Reducing Emissions (S/unit) Units Reduced Firm A Firm B 10 15 10 20 35 50 25 30 75 234 Marginal Cost of Reducing Emissions (S/unit) Units Reduced Firm A Firm B 10 15 10 20 35 50 25 30 75 234

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Marginal Cost of reducing Emissions unit Unit reduced Firm A Firm B Under marketbased incentive 1 1... View the full answer