Question

There are two polluters in a specific region, each of whom is currently emitting 100 units of pollution for a total of 200 units of pollution in the region. The government wants to reduce total pollution by 60 units (i.e., A_ST = 60 ). For simplicity, ignore enforcement costs. The total and marginal abatement costs of each polluter are as follows:                                       

     TAC_1 = 0.2A_1^2 → MAC_1 = 0.4A_1

TAC_2 = 0.3A_2^2 → MAC_2 = 0.6A_2

Market Approach: Tradable Pollution Permits

Suppose that each firm is issued the same number of pollution permits designed to achieve the 60-unit reduction. That is, each firm initially receives 70 permits (200-60 = 140; 140/2 = 70) .

h. What is the equilibrium quantity of permits traded?

i. Who buys permits? Who sells permits?

j. Is the tradable pollution permit system cost-effective? Why or why not?

Answer 1