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(6 points total) Consider two firms with the following marginal abat.pdf

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(6 points total) Consider two firms with the following marginal abatement costs (MAC) as a function of emissions (E): MAC_1 = 18 - 2E_1 MAC_2 = 12 - E_2, and assume marginal external damages (MED) from the aggregate emissions of both firms (E_Agg = E_1 + E_2) is: MED = .5E_Agg. a. (3 points) What is the socially efficient level of aggregate emissions (E*_Agg)? Explain your answer. b. (3 points) Suppose the government institutes a cap and trade policy. What will the price of a permit be? How much will each firm emit? Explain your answer..

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(6 points total) Consider two firms with the following marginal abatement costs (MAC) as a function of emissions (E): MAC_1 = 18 - 2E_1 MAC_2 = 12 - E_2, and assume marginal external damages (MED) from the aggregate emissions of both firms (E_Agg = E_1 + E_2) is: MED = .5E_Agg. a. (3 points) What is the socially efficient level of aggregate emissions (E*_Agg)? Explain your answer. b. (3 points) Suppose the government institutes a cap and trade policy. What will the price of a permit be? How much will each firm emit? Explain your answer.

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