Perspective and Efficiency:
Answeer these questions very simply show each step. Consider two polluting firms. The marginal cost of abatement for firm 1 is MC_1 = e_1 + 300, and the marginal cost of abatement for firm 2 is MC_2 = 3e_2, where e_1 and e_2 are the tons of pollution abatement by firms 1 and 2, respectively. Baseline pollution levels are bl_1 = 2000 and bl_2 = 2000.
a. Write down two equations that ensure that the goal will be met cost-effectively. Explain in words what each equation ensures.
b. Solve the equations for the cost-effective abatement allocation and .
c. Suppose that the government wants to achieve this abatement level with a pollution tax. What tax rate (in dollars per ton) should be levied? How much tax revenue will be raised from each firm?
d. Suppose that the government wants to achieve the cost-effective abatement level with a cap-and-trade scheme. How many permits will be created? What will be the equilibrium market price of a permit?
e. Which policy (tax or cap-and-trade) will guarantee that a cost-effective allocation is reached, and why?
f. Calculate the total abatement cost for firm 1 and for firm 2 under the cost-effective abatement allocation.
Consider the allocation e_1 = 800, e_2= 800 (which is not the cost-effective allocation). Calculate the total abatement cost under this allocation for each firm. Verify that the total abatement cost across both firms is greater than it is under the cost-effective allocation