Question

In a region that must reduce emissions, three polluters currently emit, in total, 30 units of emissions.  The three firms have the following marginal abatement cost functions that describe how marginal costs vary with the amount of emissions each firm reduces.

            Firm                 Firm 1                          Firm 2                          Firm 3

            Emissions         Marginal                      Marginal                      Marginal

            Reduction        Abatement                   Abatement                   Abatement

                                    Costs                            Costs                            Costs

         

                 1                   $1.00                            $1.00                            $2.00

                 2                   $1.50                            $2.00                            $3.00

                 3                   $2.00                            $3.00                            $4.00

                 4                   $2.50                            $4.00                            $5.00

                 5                   $3.00                            $5.00                            $6.00

                 6                   $3.50                            $6.00                            $7.00

                 7                   $4.00                            $7.00                            $8.00

                 8                   $4.50                            $8.00                            $9.00

                 9                   $5.00                            $9.00                          $10.00

               10                    $5.50                          $10.00                           $11.00

Suppose this region needs to reduce emissions by 14 units and plans to do it using a permit program that auctions permits off to the highest bidder.

a.       How many permits will the control authority auction off?  Why?

b.      Assuming no market power, how many permits would each of the firm be expected to buy?

c.       Assuming demand equals supply, what price would be paid for each permit?

d.      If the control authority decides to use an emissions tax rather than a permit system, what tax rate would

         achieve the 14 unit reduction?

Answer 1