1. Consider the situation posed in Problem 1

(a) in Chapter 14.

a. Compute the allocation that would result if 10 tradable effluent permits were given to the second source and 9 were given to the first source. What would be the market permit price? How many permits would each source end up with after trading? What would the net permit expenditure be for each source after trading?

b. Suppose a new source entered the area with a constant marginal cost of control equal to $1,600 per unit of emission reduced. Assume further that it would add 10 units in the absence of any control. What would be the resulting allocation of control responsibility if the cap of only 19 total units of effluent allowed were retained? How much would each firm clean up? What would happen to the permit price? What trades would take place?