We emphasize a strength of market based mechanisms is their ability to achieve cost effectiveness with...

 

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We emphasize a strength of market based mechanisms is their ability to achieve cost effectiveness with limited information. For a tax, this can be seen by observing that cost effectiveness is associated with satisfying the equimarginal principle, and that all agents will abate up until marginal cost equals the tax, hence they will have the same marginal costs. Consider an example with two firms that have direct (total) abatement costs equal to C(a1) = a and C2(a2) = a, where a and a2 represent the quantities of abatement for firms 1 and 2, respectively. Suppose that there is a constant marginal benefit of abatement, equal to y. Suppose that the allocation a = 12 and a2 = z is a cost effective allocation. What is z? (2) points, show your work) We emphasize a strength of market based mechanisms is their ability to achieve cost effectiveness with limited information. For a tax, this can be seen by observing that cost effectiveness is associated with satisfying the equimarginal principle, and that all agents will abate up until marginal cost equals the tax, hence they will have the same marginal costs. Consider an example with two firms that have direct (total) abatement costs equal to C(a1) = a and C2(a2) = a, where a and a2 represent the quantities of abatement for firms 1 and 2, respectively. Suppose that there is a constant marginal benefit of abatement, equal to y. Suppose that the allocation a = 12 and a2 = z is a cost effective allocation. What is z? (2) points, show your work)