In Country X, there are two coal power plants (plant 1 and plant 2) that emit carbon dioxide (CO2) into the environment. Plant 1 releases 40 units of CO2 and plant 2 releases 20 units of CO2. To reduce the effect from global warming, the government in country X sets an aggregate abatement standard (AST) of 20 units. The plants' cost functions are as follows, where the dollar values are in thousands: Plant 1: Plant 2: TAC1 = 20 + 2(A1), TAC2 = 5 + (A2), MAC1 = 4A1, MAC2 = 2A2. a) Suppose that two power plants take the abatement responsibility (of carbon dioxide) uniformly. Quantitatively assess the cost implications. Draw a diagram with MAC1 on the left axis and MAC2 on the right axis to illustrate your answer. (6 marks) b) Now, the government in country X allows plant 1 and plant 2 to trade the abatement permit of carbon emission. Each plant will be given 10 abatement permits. Compare the costs of this allocation to that of the uniform abatement with the aid of the diagram in part a). What is the level of pollution to each plant with the cost-effective abatement allocation? (6 marks) c) A government official comments that, if we control the permit price to be $15, cost effective abatement can still be achieved. Evaluate the comment. (5 marks) d) What is the economic rationale behind setting an aggregate abatement standard of 20 units? (3 marks) In Country X, there are two coal power plants (plant 1 and plant 2) that emit carbon dioxide (CO2) into the environment. Plant 1 releases 40 units of CO2 and plant 2 releases 20 units of CO2. To reduce the effect from global warming, the government in country X sets an aggregate abatement standard (AST) of 20 units. The plants' cost functions are as follows, where the dollar values are in thousands: Plant 1: Plant 2: TAC1 = 20 + 2(A1), TAC2 = 5 + (A2), MAC1 = 4A1, MAC2 = 2A2. a) Suppose that two power plants take the abatement responsibility (of carbon dioxide) uniformly. Quantitatively assess the cost implications. Draw a diagram with MAC1 on the left axis and MAC2 on the right axis to illustrate your answer. (6 marks) b) Now, the government in country X allows plant 1 and plant 2 to trade the abatement permit of carbon emission. Each plant will be given 10 abatement permits. Compare the costs of this allocation to that of the uniform abatement with the aid of the diagram in part a). What is the level of pollution to each plant with the cost-effective abatement allocation? (6 marks) c) A government official comments that, if we control the permit price to be $15, cost effective abatement can still be achieved. Evaluate the comment. (5 marks) d) What is the economic rationale behind setting an aggregate abatement standard of 20 units
