Q2B.
i) Consider two marginal abatement cost curves (MAC) for a single firm. MAC? represents the current condition with old
technology. MAC? refers to abatement costs that the firm would experience after engaging in a relatively expensive research
and development (R&D) program to develop a new method of reducing emissions. Show how the price of permit works as an
incentive for firm to improves it's technology and reduce it's emission? Explain. [show by measuring (e.g., addition or
subtraction) areas under the curves]. [5 points]
ii) Consider a simple model of emission control of an economy. Assume, the shape of marginal damages (MD), and marginal
abatement cost (MAC) curves are typical. Show how you can introduce a two-part emission charge (taxes) system to reduce the
burden of firm's tax payments. [show by measuring (e.g., addition or subtraction) areas under the curves]. [4 points]