Question

Please answer E only

. Below are the marginal abatement costs from two different sources. They currently emit 100 tons each.

A. What would the total abatement cost be for an equiporportional cutback to a total of 100 tons?

B. Suppose we issue 10 transferable permits, each entitles the firm to 10 tons of emissions. They are distributed equally to both sources. What are the final emissions each of the two sources?

            C. What are the total abatement costs after all adjustment have been made from A and B?

            D. Is there a cost savings from using the equimarginal principle? If so, how much?

E. If all of the permits given to one and none to the other. Will the results be the same in terms of individual and total emissions? If so, show the distributional gains from trade will be different between the two sources.

	Marginal Abatement Costs
Emissions (tons)	Source A	Source B
0	360	96
10	200	56
20	152	36
30	112	28
40	84	24
50	60	20
60	40	16
70	28	12
80	16	8
90	8	4
100	0	0

Answer 1

Answering E only as thats the one asked for.

Yes the results will be the same since both companies will trade until their marginal costs of abatement are equal. With 10 permits in total, this will happen only at 70 for source A and 30 for source B.

Lets say A is given all the 10 permits first. B will buy 3 permits from A. Gain that A has from selling 3 permits is 8+16+28=52. Gain that B has from buying the permits is (96+56+36)-52=136.

On the other hand, now lets assume that B is given the permits. Now A will keep buying till 70 emissions. Cost to A=4+8+12+16+20+24+28=112. Gain to A=(360+200+152+112+84+60+40)-112=896.

It can be seen that the distributions gains are indeed different, dpending upon to whom the permits are given.