Carbon dioxide emissions are one of the major causes of air pollution. Whenever a firm emits carbon dioxide due to its business activities, it creates externalities for others.

(a) According to our lectures, should carbon dioxide emissions be banned completely from an economic perspective? "Completely banned" means no firms can emit carbon dioxide. Please explain. (6 points)

Consider a world with three firms. Carbon dioxide emissions by different firms are different, and the cost of reducing emissions varies among them as shown in the following table:

Firm Emission of CO2 Cost of Reducing Emission by 1 Unit

A 50 units $20

B 30 units $30

C 40 units $40

Now, suppose all governments in the world agree to use emission permits to control the total amount of carbon dioxide to be emitted, and all governments in the world want to reduce the emission to 60 units. As a result, 60 permits will be issued and the holder of 1 emission permit can emit 1 unit of carbon dioxide legally.

(b) If each firm will be given 20 permits, will voluntarily trade happen among the firms? Describe who are buyers and who are sellers and how many permits will be traded among them.

(c) From the perspective of economic efficiency, should the permits for the emission of carbon dioxide be distributed equally among firms (that is each firm receives 20 permits) or by using auction (which is buyers willing to pay the highest price will get the permits)? Explain.