Reference no: EM132446065

1) Suppose two countries with domestic cap-and-trade policies are considering linkingtheir two systems. Country A has a cap of 50 tons of emissions, a domestic marginal costof abatement of $10 and an uncontrolled emissions level of 90 tons, while Country B hasa cap of 40 tons, a domestic marginal cost of abatement of Q, where Q = tons of emission abatement, and an uncontrolled emissions level of 80 tons.

a) Before linkage what would be the prices in the two separate markets and howmuch abatement would each country choose?

b) Suppose these two markets were linked by allowing each country to buy fromand sell allowances to the other: (i) what would be the prices in the twomarkets? (ii) How much would each country abate? (iii) Describe the transfer ofallowances, if any, that would take place between the two countries.

c) Compare the total control costs (the sum of both countries' abatement costs)with and without linkage. Under which scenario are the control costs smaller?Why?

2)Suppose that the supply of a depletable resource is fixed at 30 units to be allocatedacross two periods. Assume that the Period 1 and Period 2 inverse demand curves forthe resource are given by the equations below:Demand in Period 1: P = 9 - 0.3Q Demand in Period 2: P = 9 - 0.2QFurthermore, assume that the marginal cost of extracting the resource is constant at $3per unit. Finally, assume the discount rate r = 0.10.

a) Write out the present value of marginal net benefit equation for each period, andgraph these equations on a single graph that incorporates the resource constraint

b) What is the dynamically efficient allocation of the resource? Show your answer bothmathematically and on your graph from part (a).

c) Calculate the present value of marginal user cost at the efficient allocation

d) Calculate the total present value of net benefits to society at the efficient allocation,and shade in this area on your graph from part (a).