Refer to the diagram for Study Exercise 16, which shows the marginal cost of abatement of GHGs for each of two firms, LoCost Inc. and HiCost Inc. The government has imposed a direct regulatory control requiring each firm to abate 100 tonnes of GHGs.

a. With the direct regulatory control in place, what is the MC of abatement for each firm?

b. In this situation, what is the total combined cost of abating 200 tonnes of GHGs? (Hint: For each firm the total cost of abating X tonnes is given by the area under its MC curve up to X.)

c. Now suppose the government replaces the direct regulatory control with an emissions tax of $30 per tonne. With this policy in place, what is the marginal benefit the firms of abating one extra tonne of GHGs?

d. With the emissions tax in place, explain how each of the two firms will adjust their abatement activity. What is the total amount of emissions abatement, and what is each firm’s MC of abatement?

e. With the emissions tax in place, what is the total combined cost of the emissions abatement?

f. If you were advising the government, which pollutionreduction policy would you recommend, and why?

Exercise 16

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MCHICost 40 MC LoCost 30 10 50 100 150 Tonnes of GHG Emissions Abated Dollars 20