Q1. (40 points total for the 4 parts) Two firms each release 10 units of eau de skunk (EDS), a uniformly mixed pollutant. The marginal costs and total costs of controlling EDS emissions are listed in the following table: Fim1 Firm 1 Firm 2 Firm 2 Marg Total Marg Total Emissions Reduction Cost Cost Cost Cost 10 0 O O 0 0 9 1 3 3 8 8 8 2 12 24 32 1 7 3 15 27 40 72 6 4 30 57 53 125 5 5 33 90 63 188 4 6 38 128 90 278 3 7 45 173 104 382 2 8 61 234 120 502 1 9 69 303 136 638 0 10 92 395 152 790 a. (6 pts.) The Department of Efficient Environmental Protection (DEEP) has determined that emissions should be reduced from the current 20 to 8 units. In the interest of fairness, it has been proposed that all firms cut their emissions by the same amount. Find the total cost of achieving the reductions by requiring each firm to cut emissions by the same amount. You are asked to evaluate this plan. Is it efficient? Is it fair? Explain your reasoning. b. (14 pes) Find an emission charge that will allow DEEP to achieve the required emission reduction Calculate the abatement costs and taxes for each firm. Compared to Parta, who benefits who loses and by how much? Explain c. (14 pts) Suppose, you decide to use a cap on emissions. You give the firms 2 emission allowance cach and auction the remaining ones. What will the price of allowances likely be in the section? Since you are only auctioning 4 allowances rather than all 8, how will this affect the price of the auctioned allowances? How many will each firm buy? Explain briefly (6 pts.) Is there a downside to giving firms some of the allowances for free? Explain Q1. (40 points total for the 4 parts) Two firms each release 10 units of eau de skunk (EDS), a uniformly mixed pollutant. The marginal costs and total costs of controlling EDS emissions are listed in the following table: Fim1 Firm 1 Firm 2 Firm 2 Marg Total Marg Total Emissions Reduction Cost Cost Cost Cost 10 0 O O 0 0 9 1 3 3 8 8 8 2 12 24 32 1 7 3 15 27 40 72 6 4 30 57 53 125 5 5 33 90 63 188 4 6 38 128 90 278 3 7 45 173 104 382 2 8 61 234 120 502 1 9 69 303 136 638 0 10 92 395 152 790 a. (6 pts.) The Department of Efficient Environmental Protection (DEEP) has determined that emissions should be reduced from the current 20 to 8 units. In the interest of fairness, it has been proposed that all firms cut their emissions by the same amount. Find the total cost of achieving the reductions by requiring each firm to cut emissions by the same amount. You are asked to evaluate this plan. Is it efficient? Is it fair? Explain your reasoning. b. (14 pes) Find an emission charge that will allow DEEP to achieve the required emission reduction Calculate the abatement costs and taxes for each firm. Compared to Parta, who benefits who loses and by how much? Explain c. (14 pts) Suppose, you decide to use a cap on emissions. You give the firms 2 emission allowance cach and auction the remaining ones. What will the price of allowances likely be in the section? Since you are only auctioning 4 allowances rather than all 8, how will this affect the price of the auctioned allowances? How many will each firm buy? Explain briefly (6 pts.) Is there a downside to giving firms some of the allowances for free? Explain
