Suppose There Are Two Firms in an Industry with Marginal

question 15

Essay

Suppose there are two firms in an industry with marginal abatement cost curves:
MAC_A = 1,200 - 2E_A
MAC_B = 800 - 2E_B
If the regulator wants to use a transferable emission permit scheme to achieve industry abatement of 50%,how many permits will it need to issue and at what price will they trade? If each firm receives one-half of the permits at no charge,explain what permit trading will take place and calculate the total compliance cost of each firm under this form of regulation.A.B.Firm B has emissions of 150,so it does have the extra 100 permits to sell.The following table summarizes the total abatement cost,permit acquisition costs and total compliance costs for each firm.
$$\begin{array} { | l | l | l | r | } \hline & \text { Total Abatement Cost } & \text { Permit Cost } & \text { Total Compliance Cost } \\\hline \text { Firm A } & 1 / 2 ( 250 \times 500 ) = 62,500 & 100 \times 500 = 50,000 & 112,500 \\\hline \text { Firm B } & 1 / 2 ( 250 \times 500 ) = 62,500 & ( 50,000 ) & 12,500 \\\hline\end{array}$$
Total compliance cost is equal to the firms' total abatement cost plus their permit acquisition costs.Since Firm B is able to earn revenue from its selling its excess permits,its total compliance cost is considerably lower than the total compliance cost of Firm

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