Halifax has launched a voluntary emissions trading program as part of its strategy to ensure cost-effective compliance with the Clean Air Act requirements. The objective is to achieve a 16 percent reduction in carbon monoxide (CO) emissions among participating firms. In this program, each firm is initially allocated an equal number of emission permits, which represent the legal right to emit a specified amount of pollutants. Firms that can reduce emissions at a lower cost have the option to sell their excess permits to others facing higher abatement costs, thereby fostering a cost-effective reduction in emissions across all participating firms.

• Firm 1: TAC1=1000+2.5*(A1)²
• Firm 2: TAC2=500+1.5*(A2)²

where A1 and A2 are the percentages of CO emission abatement achieved by Firm 1 and Firm 2, respectively.

a) Derive the Marginal Abatement Cost (MAC) functions for each firm. Then, calculate the TAC and MAC for each firm if a uniform abatement standard of 16% is applied.

b) Calculate the cost-effective abatement allocation that could be achieved. Quantify the cost savings associated with this allocation by comparing it with the costs under a uniform abatement standard.

c) Explain how the trading of permits can lead to a cost-effective solution. Then, determine the price at which each tradable permit must be set to achieve the cost-effective solution identified in part (b)