Two firms (firm 1 and firm 2) can control pollution with the following marginal abatement costs:...

Two firms (firm 1 and firm 2) can control pollution with the following marginal abatement costs:

MAC1=100q1

MAC2=200q2

where q1 and q2 are the amount of pollution reduced by the first and second firms. Assume that with no controls at all, each firm would be emitting 100 units of pollution, or 200 units for both firms.

Suppose that the government sets up an emissions trading market mechanism to achieve a pollution goal of 100 units of total pollution. The government would issue 100 emissions permits. Each permit represents the right to emit one ton of emissions. The government then freely allocates 50 permits to each firm. In the emissions trading market, who will buy permits? How many permits the buyer will buy?

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