1. Suppose an emissions trading market is created to achieve the proposed 20 unit emissions target.

At the equilibrium in the emissions trading market, how will the total abatement

[= (uncontrolled emissions - emissions target)] be divided between Firm1 and Firm2?

Firm1 will clean up ____ units of emissions and

Firm2 will clean up _____ units of emissions at the market equilibrium

scientists discovered a pollutant called Schitt being released into the air by two firms, Firm1 and Firm2, located in the small town of Rose. A non-market valuation study was conducted to estimate the monetary value of damages caused by Schitt emissions according to the marginal damage function:

MD = 4E where E = (E₁+E₂) the aggregate emissions by Firm1 (E₁) and Firm2 (E₂)

Firm1 has marginal abatement cost curve MAC₁ = 80 - 4E₁

Firm2's marginal abatement cost curve for Schitt is MAC₂ = 40 - 2E₂.

Based on the harmful effects of Schitt, the pollution control authority has set a new emissions target of 20 total units (E₁+E₂). It is trying to decide whether to use a performance-based emissions standard or an emissions trading market to achieve the new emissions target.