Scenario: Consider two utilities X and Y, which are subject to pollution control regulation.

They try to maximize their own profit.

• The price for electricity generation received by each utility is $100/MWh.
• Assume that each firm produces 1 MWh of power regardless of regulation.
• Each utility separately emits 10.0 lbs of NOx/MWh in the absence of regulation.
• The regulator wishes to limit total emissions to 14.0 lbs of NOx/MWh.
• In other words, the goal is total abatement of 6.0 lbs of NOx/MWh ( because 10 + 10 - 14 = 6)
• Utility X has a total abatement cost of TACx(ax) = 3ax2 and marginal abatement cost of MACx = 6ax
• Utility Y has a total abatement cost of TACx(ax) = 8ax2 and marginal abatement cost of MACx = 16ax

Keep in mind that profit is equal to total revenue minus total cost.

1.) Both firms are under a uniform standard, where they evenly split the total abatement.

For each firm, calculate: (this part I already tried to calculate)

• Abatement (ax and ay)

Due to the uniform standard, since the total abatement of NOx/MWh is 6 lbs, both firms x and y would now need to abate 3 lbs.

• MAC for the last unit of abatement

Both of there last units of abatement is the 3rd unit so you would plug 3 into their MAC equations:

Firm x:

1. MACx = 6ax
2. MACx = 6(3)
3. MACx = $18

Firm y:

1. MACx = 16ax
2. MACx = 16(3)
3. MACx = $48

• Total profits

Firm x:

1. TACx(ax) = 3ax2
2. TAC = 3(3)^2
3. TAC = 3*9
4. TAC = $27

Firm y:

1. TACx(ax) = 8ax2
2. TAC = 8(3)^2
3. TAC = 8*9
4. TAC = $72

TOTAL PROFITS:

1. TP = (Revenue of firm x) + (revenue of firm y) - (TAC of x) - (TAC of y)
2. TP = (100*1) + (100*1) - (27) - (72)
3. TP = $101

HERE IS WHERE THE QUESTION PART IS!!!!

2.Now, assume both firms are under a tradable permits program, where firms may trade permits to pollute according to their marginal abatement costs.

Calculate:

(a)Abatement (a_x and a_y)

b)MAC for the last unit of abatement

(c)Total profits