1. (25 points) Consider a simplified example of pollution and abatement. The following table contains the marginal abatement costs of three firms, related to the quantity of emissions. Each firm is currently emitting 10 tons/week (the status quo). Emissions (tons/week) 10 9 8 7 6 5 4 3 2 1 0 Marginal Abatement Cost ($/ton) Firm 1 Firm 2 Firm 3 0 0 0 4 8 12 16 20 24 12 28 20 36 24 46 28 58 36 10 SO SODAN Over A CON Suppose that the governing body wants to reduce emissions in this industry by 50%. However, they are unsure of the best strategy to achieve this goal. a) A junior member of the governing body suggests a uniform performance standard be imposed on all firms. What would be the total cost to society (i.e., the total abatement costs) of such a scheme? Explain. b) You suggest that a cap and trade system of pollution allowances might be preferable. If a cap and trade system (that required a 50% reduction in emissions, and in which all firms received the same number of allowances) were enacted: b.1) If an allowance gives a firm the right to emit 1 ton, how many allowances would each firm receive? b.2) After allowing for trade, how many tons/week would each firm be emitting? Explain. b.3) What would be the total cost to society of the cap and trade scheme? c) Is there a per unit tax that could achieve the same outcome as the cap and trade scheme? If so, what would be the amount of the tax (Explain). What would be the cost to society and how does this compare to the cap and trade? 1. (25 points) Consider a simplified example of pollution and abatement. The following table contains the marginal abatement costs of three firms, related to the quantity of emissions. Each firm is currently emitting 10 tons/week (the status quo). Emissions (tons/week) 10 9 8 7 6 5 4 3 2 1 0 Marginal Abatement Cost ($/ton) Firm 1 Firm 2 Firm 3 0 0 0 4 8 12 16 20 24 12 28 20 36 24 46 28 58 36 10 SO SODAN Over A CON Suppose that the governing body wants to reduce emissions in this industry by 50%. However, they are unsure of the best strategy to achieve this goal. a) A junior member of the governing body suggests a uniform performance standard be imposed on all firms. What would be the total cost to society (i.e., the total abatement costs) of such a scheme? Explain. b) You suggest that a cap and trade system of pollution allowances might be preferable. If a cap and trade system (that required a 50% reduction in emissions, and in which all firms received the same number of allowances) were enacted: b.1) If an allowance gives a firm the right to emit 1 ton, how many allowances would each firm receive? b.2) After allowing for trade, how many tons/week would each firm be emitting? Explain. b.3) What would be the total cost to society of the cap and trade scheme? c) Is there a per unit tax that could achieve the same outcome as the cap and trade scheme? If so, what would be the amount of the tax (Explain). What would be the cost to society and how does this compare to the cap and trade
