Question

a region that must reduce emissions, three polluters currently emit 30 units of emissions. The three firms have the following marginal abatement cost (MAC) functions that describe how marginal costs vary with the amount of emissions each firm reduces Firm Emissions Firm MAC $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 Firm 2 MAC $1.00 $%2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 Firm 3 MAC Reduction $%2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 10 Suppose this region needs to reduce emissions by 14 units and plans to do it using a form of cap- and-trade that auctions allowances off to the highest bidder. How many allowances will the control authority auction off (Hint: "cap-level")? a. Assuming no market power, how many of the allowances would each firm be expected to buy? Why? b. c. If control authority decided to use an emission tax rather than cap-and-trade, what tax rate would achieve the 14-unit reduction cost-effectively? Why? 2. Assume that a small town uses a referendum to overcome the free-ridership problem and determine how its residents might value a new water filtration system for its public water supply. The voting results are aggregated by the town's two districts, yielding the following demand estimates District 1: Q-160-20P1 District 2: Q-60-5P2 Where Q is the expected percent of copper to be filtered by the system and P is the price in millions of dollars a. Based on these estimates, determine the town's market demand for this public good, the new filtration system If the market supply for the system were P = 6 + 0.15Q, what would be the equilibrium price and quantity for the town? b.

Answer 1

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