Suppose there are two electricity-generating plants that emit sulfur dioxide. The environmental goal is to reduce SO2 emissions by two tons from current levels. Plant 1 can reduce SO2 emissions at a cost of $50 per ton. Plant 2 can reduce SO2 emissions at a cost of $200 per ton.

1. The command and control approach to achieving the environmental goal of a 2 ton reduction would be to mandate that each plant reduce emissions by one ton. What is the cost of the command and control approach?

2. A tradable permits approach to achieving the environmental goal of a 2 ton reduction is to issue to each plant permits equal to the plants current emissions minus one. Suppose the price of a permit is equal to $60. What is the total social cost of the tradable permits approach? How much does Plant 1 reduce emissions by? How much does Plant 2 reduce emissions by?

c. Among the two policy approaches in (a) and (b), under which approach is total abatement cost lower? Demonstrate under which approach Plant 1 is better off. Demonstrate under which approach Plant 2 is better off.