Consider the issue of emissions trading introduced in the policy study “The Kyoto Protocol.”
a. What is the economic rationale for permitting emissions trading?
b. If the objective is to minimize the cost of emissions reductions, explain what economic principle should be followed in allocating emissions reductions among two countries.
c. Suppose the marginal cost curves for emissions reductions in countries A and B are given as follows: MCA = 10 + 0.04qA, MCB = 5+ 0.02 qB. What is the most efficient allocation of an emission reduction of q0 among the two countries? (Assume that the emissions reductions of the two countries must add up to the total emissions reduction: q0 = qA + qB.)