Y7

b. Two firms that incinerate waste are near each other and are producing vast amounts of air pollution. After extensive research, the government finds that 4 gigatonnes of waste is the optimal abatement level. Thus to control the amount of pollution the government allocates pollution permits to each of them in a 50:50 manner. The firms' marginal private costs of abatement are depicted in the diagram below: MPCA Firm B Y=3x +3 50:50 permit split MPCA Firm A C A D B Y=-2x +12 Total Abatement = 4 gigatonnes i. What is the MPCA for firm A at a 50:50 permit split? [2] ii. What is the MPCA for firm B at a 50:50 permit split? [2] What is the optimal amount of abatement after trading permits? [2] iv. What is the associated MPCA for the firms after trading? [2] V . What is the value of firm A's surplus? [2] vi. What is the value of firm B's surplus? [2]