Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO2 abatement standard. Further assume that the following SO2 abatement cost functions have been estimated by each country:

TACUS = 500 + 1.5(AUS)2

MACUS = 3 AUS

TACCAN = 1000 + 3(ACAN)2

MACCAN = 6 ACAN

where AUS and ACAN represent the percent of SO2 abatement achieved by the United States and Canada, respectively, and each TAC and MAC is measured in millions of dollars.

a)If the countries implement a uniform abatement standard, find the resulting values of TAC and MAC for each nation. Based on these values, is there an economic incentive for the two nations to participate in an emissions trading program? Explain.

b)Assuming a trading program is enacted, find the cost savings associated with a cost-effective abatement solution?

c)What must be the price of a tradeable permit to achieve the cost-effective abatement allocation?