Suppose there are two firms in an industry with marginal abatement cost curves:

MACA = 1,200 - 2EA

MACB = 800 - 2EB

If the regulator wants to use a transferable emission permit scheme to achieve industry abatement of 50% from uncontrolled level,

a.How many permits will it need to issue and at what price will they trade?

b.If each firm receives one-half of the permits at no charge, explain how permit trading will take place (eg. the permit trade amount between A and B, who sells? Who buys? Also the amount transferred. )

c.Calculate the total compliance cost of each firm under this form of regulation.