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In: Economics

Suppose that the government is going to auction off permits equal to one third of total...

Suppose that the government is going to auction off permits equal to one third of total emissions in the economy (so two-thirds of all emissions must be abated), and that there will be a competitive market for permits sold on an exchange (i.e., in a market) with publicly posted prices so that it is very easy to buy or sell permits. Suppose now that a firm with a marginal abatement cost of $8 has a special opportunity to buy 100 permits at a price of $15 per permit.

True or False: The firm should buy the permits even though their marginal cost is below $15.

Solutions

Expert Solution

true, in the question ,the government is going to auction off permits equal to one third of total emissions in the economy (so two-thirds of all emissions must be abated), and that there will be a competitive market for permits sold on an exchange (i.e., in a market) with publicly posted prices so that it is very easy to buy or sell permits. And now that a firm with a marginal abatement cost of $8 has a special opportunity to buy 100 permits at a price of $15 per permit.

however the firm will buy will buy 100 permits even though thir marginal cost is below $ 15. because here the firm will get a monopoly in holding the permits of one third of total emissions in the economy. this is such a huge benefit for the firm and by acquiring this permits the firm can transfer the permission permits to other firm with high price or they can distribute the permits of emission among the different firms below the size of the emission permits holding firm. thus even though marginal abatement cost of$8 has a special opportunity to buy 100 permits at a price of $15 per permits , the firm will resort to buy the permits. the power in handling the emission permits and the monopoly getting the firm in holding the permits allow the firm to act as a leader in the economy compared to other firm who don't have the emission permits. thus the money gain and the authority gaining in emission permit hold the firm to buy the permits eventhough their marginal cost is below $15

Rahul Sunny answered 3 months ago
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