How many will be traded and what will be the equilibrium

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Reference no: EM133501059

Problem

I. Marginal abatement functions for 2 polluting plants are: MAC1 = 100 - 4E1 and MAC2 = 50 - E2 Emissions are measured in tons per year. Government scientists believe that total emissions from the two plants should not exceed 50 tons per year.

1. To reduce total emissions to 50 tons per year at the lowest possible abatement cost, how much should each plant abate?

2. Assume that each plant is allocated 25 transferable permits free of charge where one permit allows 1 ton of emissions. Which plant will buy, and which will sell its permits? How many will be traded and what will be the equilibrium permit price once trading stops? Compute the private costs of this cap-and-trade program for each plant.

3. Now suppose the plants are not allowed to trade their permits, which effectively makes it a 25-ton uniform emission standard. Compute the private costs of this policy for each plant.

4. Compute the private cost savings for each plant and the total social cost savings if the firms would be allowed to trade their permits.

II. A firm's marginal abatement cost function is given by MAC = 100 - 5E. The firm is given 16 tradeable pollution permits free of charge (each permit allows one tonne of pollution) and the current market price per permit is $20.

1. How many tonnes will the firm emit given the $20 price per permit? What will be its private compliance cost? Now suppose that, after adopting new abatement technology, the firm's marginal abatement function becomes MAC = 60 - 3E.

2. Given no change in permit price, how many tons will the firm now emit? If your answer is not a whole number, round to the nearest ton - also for the remaining parts of this question.

3. Will the firm buy or sell permits in the cap-and-trade market and how many? What will be the private compliance cost to the firm after trading?

4. What will be the net gain to the firm from adopting the new abatement technology?

Reference no: EM133501059

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