Question 2

There are two firms who are identical except in their location. For both firms, decreasing their emissions will increase their costs. Therefore, they have negative marginal costs and positive marginal savings of polluting. A firm's marginal cost of emitting an amount e is given by () = 6 + . Because of their locations, the two firms differ in their impact on ambient pollution concentrations. One unit of emissions from firm 1 result in one unit of ambient pollution. Firm 2 has twice the impact on ambient environment - one unit of emissions results in two unit of ambient pollution.

a) What are the transfer coefficients for each of the two firms?

b) If there were no regulations in place, how much would each firm emit, and what would be the total pollution? c) Assume that the marginal damage per unit of ambient pollution at the receptor is such

that () = 1 . What is the efficient amount of ambient pollution, and how much 4

should each firm emit?

d) Assume the regulator wants to achieve the efficient amount of pollution and emissions from the two firms. The regulator first wants to consider ambient-differentiated emission fees. What are the two emission fees, t1 and t2, that would achieve the efficient outcome?

e) The regulator instead decides to use marketable ambient permits. Overall, the regulator issues L =13 permits (each permit is for 1 unit of pollution, not emissions), with L1 = 7 permits given to firm 1 and L2 = 6 permits given to firm 2. After trading, how much would each firm emit? How much would each firm contribute to the overall ambient pollution? What would be the price of a permit?