Suppose a hypothetical firm is evaluating a proposal from its engineering department to invest in research and development to discover and implement an innovative and lower-cost pollution abatement technology, one that would reduce its marginal abatement costs. It must decide whether to stick with its current technology or invest millions of dollars to develop the new technology. Explain (and use a clearly- labelled diagram with your explanation) how the incentive to undertake this investment differs depending on whether the firm is subject to a command-and-control emission standard or a cap-and-trade emission program.

 

PLEASE DRAW THE GRAPH(S)