Suppose there are two firms in an industry with marginal abatement cost curves: MACA = 1200 - 2EA

MACB = 800 - 2EB

If the regulator wants to use a transferable emission permit scheme to achieve industry abatement of 50%:

a. How many permits will it need to issue?

b. If each firm receives one-half of the permits at no charge initially, explain what permit trading will take place and calculate the total compliance cost of each firm under this form of regulation.

c. Compute gains of each party from the TEPs.