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Equilibrium price of permit

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Reference no: EM133066769

In Pastgreen, there are two firms, A and B with the following marginal costs of emission reduction.MCaaMCbb

= 900 - 15 X

= 2000 - 25 X

where X represents the pollution level. Suppose the Pastgreen council sets the pollution target equal to 84. 

  1. If the Pastgreen council decides to levy taxes on pollution, how much tax (per unit of emission) will lead to an efficient outcome? Is this regulation cost-effective?
  2. Suppose that firms successfully lobby against the tax system and Pastgreen council changes its policy from pollution tax to Cap-And-Trade regulation according to which firms are allowed to trade permits. Under the new regulation system, how much would be the equilibrium price of each permit? Is this system cost-effective?
  3. If you are a member of the Pastgreen council, which policy (no regulation, uniform standard level of pollution, pollution tax, or CAT) would you vote for? Why?

Reference no: EM133066769

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