Question

2. Two firms can control emissions at the following marginal costs: $MC_x = 200a_x$ and $MC_y = 100a_y$ where $a_x$ and $a_y$ are, respectively, the amount of emissions reduced by firm $x$ and firm $y$. Assume that with no control at all, each firm would be emitting 20 units of emissions or a total of 40 units for both firms. (a) Consider a cap-and-trade system that aims for a total reduction of 21 units of emissions is necessary. i. What is the equilibrium allocation of permits to each firm? ii. At what price would these permits sell for at an auction (b) Assume that the control authority wanted to reach its objective by using an emissions charge system instead. i. What tax amount should them impose to reach this equilibrium? ii. How much revenue would the government collect? (c) Why is cap-and-trade more cost-effective than a uniform standard where each firm reduces pollution by 10.5 units?

          2. Two firms can control emissions at the following marginal costs: $MC_x = 200a_x$ and $MC_y = 100a_y$ where $a_x$ and $a_y$ are, respectively, the amount of emissions reduced by firm $x$ and firm $y$. Assume that with no control at all, each firm would be emitting 20 units of emissions or a total of 40 units for both firms.
(a) Consider a cap-and-trade system that aims for a total reduction of 21 units of emissions is necessary.
	 i. What is the equilibrium allocation of permits to each firm?
	 ii. At what price would these permits sell for at an auction
(b) Assume that the control authority wanted to reach its objective by using an emissions charge system instead.
	 i. What tax amount should them impose to reach this equilibrium?
	 ii. How much revenue would the government collect?
(c) Why is cap-and-trade more cost-effective than a uniform standard where each firm reduces pollution by 10.5 units?

2. Two firms can control emissions at the following marginal costs: MCx = 200ax and MCy = 100ay where ax and ay are, respectively, the amount of emissions reduced by firm x and firm y. Assume that with no control at all, each firm would be emitting 20 units of emissions or a total of 40 units for both firms.
(a) Consider a cap-and-trade system that aims for a total reduction of 21 units of emissions is necessary.
i. What is the equilibrium allocation of permits to each firm?
ii. At what price would these permits sell for at an auction
(b) Assume that the control authority wanted to reach its objective by using an emissions charge system instead.
i. What tax amount should them impose to reach this equilibrium?
ii. How much revenue would the government collect?
(c) Why is cap-and-trade more cost-effective than a uniform standard where each firm reduces pollution by 10.5 units?

Added by Sergio S.

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