Suppose two countries with domestic cap-and-trade polices are considering linking their two systems. Country A has a cap of 20 tons of emissions, a domestic marginal cost of abatement of $10 and an uncontrolled emissions level of 60 tons, while Country B has a cap of 40 tons, a domestic marginal cost of abatement of $1q, where q = the tons of emission abatement, and an uncontrolled emissions level of 80 tons.

a. Before linkage what would be the prices in the two separate markets and how much abatement would each country choose?

b. If these two markets were linked by allowing each country to buy from and sell allowances to the other, what would be the prices in the two markets? How much would each country abate? Describe the transfer of allowances, if any, that would take place between the two countries.