Question

2. Cap-and-trade for two firms .Suppose that there are two electricity generators, indicated by n- 1,2. The price of electricity is again fixed at $2 per unit. 7 Firm 1 has a production function e(x)x-^x2 forx<3 . Firm 2has a production function e2(x)=2x-4x2 for x < 4 .For both firms, the price of fuel is p1, and the firm has no fixed costs. What is the price of the credits? Which firm buys and which firm sells? How many credits are traded? 2.4 2.5 What are profits of each firm? 3. Clean energy standards 3.1 What is a clean energy standard? (You can refer to the Clean Energy Standard Act of 2012 (S.2146) as an example.) 3.2 How does a clean energy standard differ from an emissions cap?

Answer 1

Solving question 2 as per the policy:

4-4 2. 2 2 2 5 3.S CamScanner

As the regulator assigns x=1 to firm 1, hence it would only produce till x=1. Hence, its profits would be =5,
while firm 2 consumes x=3, hence profits = 7.5
Total industry profits= 12.5
However, if firm 1 buys one credit from firm 2, its profit increase to 6(2) - 2^2 = 8,
while for firm 2, x=2 and profits become 4x-x^2/2 = 8- 2 = 6
Total Industry profits= 14.
If 2 credits are bought:
Profit for firm 1= 6(3) - 9 = 9
For firm 2: P2= 4(1) - 0.5 = 3.5
Total Industry profits= 12.5


Hence, it makes sense for firm 2 to trade one permit with firm 1. Maximum Price= Revenue earned by selling additional unit. Hence, Price = 3