Consider two polluting firms with marginal production costs c 1 0 and c 2 0 25 Pollution is proportional to output with emission coefficients d 1 1 and d 2 0 Inverse market demand is P(X) 1X (a) Determine the Cournot Nash equilibrium in the absence of environmental regulation (b) Assume each firm h...

Lets tackle this question in two parts as per the question itself Part a Determine the CournotNash equilibrium in the absence of environmental regulat ...

Consider two polluting firms with marginal production costs c 1 =0 and c 2 =0.25. Pollution is

Question:

Consider two polluting firms with marginal production costs c₁=0 and c₂=0.25. Pollution is proportional to output with emission coefficients d₁=1 and d₂=0. Inverse market demand is P(X)=1−X.

(a) Determine the Cournot-Nash equilibrium in the absence of environmental regulation.

(b) Assume each firm holds an initial permit endowment of ē₁=ē₂=0.375. Suppose the firms negotiate over permit levels. What is the likely outcome?

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