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Consider two firms with the following marginal abatement costs (MAC) as a function of emissions (E): MAC_1 = 18 - 2E_1 MAC_2 = 12 -

Consider two firms with the following marginal abatement costs (MAC) as a function of emissions (E):

MAC_1 = 18 - 2E_1

MAC_2 = 12 - E_2,

and assume marginal external damages (MED) from the aggregate emissions of both firms (E_Agg = E_1 + E_2) is:

MED = .5E_Agg.

To achieve the socially efficient level of aggregate emissions (E*_Agg), the government institutes a cap and trade policy and sets the cap equal to the socially efficient level of emissions (E*_Agg). If firm 2 is initially grandfathered 4 permits, it will buy ____ more permits.

(Note: your answer can be positive or negative; if it is positive, the firm is buying additional permits; if it is negative, the firm sells permits. So, for example, an answer of -10 implies that the firm sells 10 permits)

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