In a region that must reduce emissions, three polluters currently emit 10 units of emissions each, 30 in total. The three firms have the following marginal abatement cost functions that describe how marginal costs vary with the amount of emissions each firm reduces. Suppose this region needs to reduce emissions by 14 units and plans to do it using a form of cap-and-trade scheme that auctions allowances (pollution permits) off to the highest bidder. NOTE: each allowance permits the firms to emit a single unit of pollution. Firms cannot emit pollution without allowances to do so.

Firm Firm 1 Firm 2 Firm 3 Emissions Marginal Marginal Marginal Reduction Cost Cost Cost 1 $1.00 $1.00 $2.00 2 $1.50 $2.00 $3.00 3 $2.00 $3.00 $4.00 4 $2.50 $4.00 $5.00 5 $3.00 $5.00 $6.00 6 $3.50 $6.00 $700 7 $4.00 $700 $8.00 8 $4.50 $8.00 $9.00 9 $5.00 $9.00 $10.00 10 $5.50 $10.00 $11.00