Reference no: EM133304725

Suppose that there are two polluters (1 and 2). If uncontrolled, each polluter emits 150 tons of pollutant per week into the air. To reduce their emissions, the polluters face the following marginal abatement costs: MAC1 = 3a1, and MAC2 = a2, where a1 and a2 indicate the level of abatement by each polluter.

1. Graph the two polluters' MAC curves.

2. Suppose government decides that emissions of 300 tons per week is acceptable.

Calculate , , , , TC1, and TC2 .

3. Now suppose that government decides that only 150 tons of emissions per week is acceptable. Calculate the cost-effective level of abatement for each of the two polluters, and.

4. Now suppose that government decides to achieve the 150-ton target level of emissions by imposing a unit emissions tax. What level of tax would distribute abatement responsibility cost-effectively between the two polluters?

5. Now suppose that government decides to allocate (free of charge) 75 transferable emissions permits to each polluter. (Each permit allows its holder to legally emit one ton of pollutant.) What will be the final allocation of permits between the two polluters if this policy is implemented?