Suppose there are two firms in an industry with marginal abatement cost curves:
MAC_A = 1,200 - 2E_AMAC_B = 800 - 2E_BIf 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

Question

Suppose there are two firms in an industry with marginal abatement cost curves:
MAC_A = 1,200 - 2E_AMAC_B = 800 - 2E_BIf 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

Quizplus · Accepted Answer

The Answer is To determine how many permits are needed,we should first calculate the unregulated emissions of each firm.Unregulated emissions are found where MAC = 0:
MAC_A = 0 = 1,200 - 2E_A0
E_A0 = 1,200/2 = 600
MAC_B = 0 = 800 - 2E_B0
E_B0 = 400
Since initial emissions of the industry equal 1,000 units,the abatement target is 500 units and remaining emissions will also be equal to 500 units so the regulator will need to issue 500 permits.To find the permit price we need to use the following two conditions:
E_A + E_B = 500
MAC_A = MAC_B
The first condition states that the emissions of each firm will add to the total emissions of the industry.Rearranging this equation yields the relationship:E_A = 500 - E_B.If we substitute this into the second condition (the equimarginal condition),we can solve for E_B.
1,200 - 2(500 - E_B)= 800 - 2E_B
600 = 4E_B
E_B = 150
Once we know E_B,we can solve for E_A = 500 - 150 = 350.The permits will trade at the price that equals MAC under the permit:
MAC_A = 1,200 - 2(350)= $500
MAC_B = 800 - 2(150)= $500
Permits will trade for $500 each.Since each firm is initially given one-half of the permits,they each receive 250 permits.Firm A has emissions of 350,so it will need to buy 100 permits from Firm 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 & ext { Total Abatement Cost } & ext { Permit Cost } & ext { Total Compliance Cost } \\hline ext { Firm A } & 1 / 2 ( 250 imes 500 ) = 62,500 & 100 imes 500 = 50,000 & 112,500 \\hline ext { Firm B } & 1 / 2 ( 250 imes 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 A.

Suppose There Are Two Firms in an Industry with Marginal