Question

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 + 0.2A for Volvo and 5 + 0.25A for Ford. Finally, the marginal abatement cost for Toyota is A − 5, where A is abatement. All three firms only care about maximizing profits and, in absence of environmental regulation, each firm will emit 50 units of pollution.

PLEASE HELP ANSWER E, F, and G ONLY THX U

a. Draw the marginal damage and the marginal abatement cost curves for Volvo. Explain in words your graph

b. If the government decides to reduce pollution to the efficient level, what would be the optimal pollution tax? Why? Explain your answer.

c. How much do Volvo, Ford and Toyota pay? How much revenue could the government collect with this tax? Why? (Hint: if you do not know the answer to b), assign a random number to the tax and calculate revenues.) Explain your answer.

d. If the government decides to introduce a Cap and Trade system, what would be the optimal number of pollution permits? Explain your answer.

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.

Answer 1