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Suppose there are 2 firms in an industry with marginal abatement cost curves: MACA = 400...

Suppose there are 2 firms in an industry with marginal abatement cost curves:
MACA = 400 - 2EA
MACB = 900 - 3EB

Also suppose that the regulator has chosen the target level of total emissions to be 400 units per year. If the government regulator issues the appropriate number of permits to achieve its environmental goal, when trading stops

a) How many units of pollution will firm B be emitting?

b) How many units of pollution will firm A have abated?

c) What will the market price per permit be?

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Answer #1

At social optimal MACA = MACB

400 - 2EA = 900 - 3EB

3EB - 2EA = 500 ..........(1)

Given EA + EB = 400 .........(2)

Solving (1) and (2)

EA = 260

EB = 140

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