There are three firms in the car production industry, where the production of cars gen- erates pollution. All three firms have the same damage function: each additional unit of emissions damages society$15. However, all three firms have different abatement technologies. The marginal abatement cost is 5 + 0.2Afor Volvo and 5 + 0.25Afor Ford. Finally, the marginal abatement cost for Toyota isA5, whereAis abatement. All three firms only care about maximizing profits and, in absence of environmental regulation, each firm will emit 50 units of pollution.

e. What would be the price of permits? How many permits would each firm buy?

Explain your answer

f. How much money could the government collect with this system? (Hint: if you do not know the answer to e), assign a number to the price and calculate the total amount.) Explain your answer.

g. Would the government prefer to tax firms or to set the cap and trade system? Why? Explain your answer.