With transferrable emissions permits, firms must have permits to generate emissions.  If a firm emits less pollution than its permits allow, it can sell its leftover permits to another firm that wishes to emit more pollutions than its permits allow.      Comment on the following: “These permits have the advantages of both standards and fees, therefore, they may be the best technique of controlling pollution.” (Hint: How do transferrable emissions permits reflect on each firm’s individual abatement costs?)

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There are three industrial firms in a town Firm Initial Pollution Level Cost of Reducing Pollution by 1 Unit A 30 units $20 40 units 20 units B с $30 $10 The government wants to reduce pollution to 60 units, so it gives each firm 20 tradable pollution permits. 1. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation? 2. How much higher would the costs of pollution reduction be if the permits could not be traded?

The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2U2 + 18, and MC = 2U2 + 2, where U is the number of units of pollution abatement. What is the optimal number of units of pollution abatement? A) o B) 1 C) 2 D) 3 E) 4

Please drag and drop the markers 1 through 5 below to denote the appropriate position on the diagram that answers the question. a) Show with marker 1 the efficient level of marginal abatement costs. b) Show with marker 2 the marginal abatement costs if each produce must reduce pollution to 7.5 units. c) Denote with marker 3 the area that measures total abatement costs for each polluter. d) Show with marker 4 the marginal abatement costs if sources 1 and 2 merged and were constrained to a maximum total emissions of 15 units. e) Show with marker 5 the total abatement costs if both sources merged and were constrained to a maximum total emissions of 15 units. Marginal Cost (in dollars) MC MC, Quantity of Emissions Reduced A Source 1 10 5 4 13 14 15 15 14 13 12 11 10 8 O Source 2 5

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Suppose the the government has set the trading price of a permit at $126 per permit. Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.) Firm Firm A Firm B Firm C Initial Pollution Permit Allocation (Units of pollution) 2 2 2 Regulation Versus Tradable Permits Action Proposed Method Regulation Tradable Permits Final Amount of Pollution Eliminated (Units of pollution) Cost of Pollution Reduction (Dollars) Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.) Total Cost of Eliminating…

Imagine a firm’s marginal abatement cost function with existing technologies is: MAC = 100 – 2E. If the firm adopts new pollution abatement technologies, its marginal abatement cost function will be: MAC = 50 – E.  If the government raises the tax on emissions from $4 to $12, the benefits of adopting the new technologies increase by $____

Example: Question 4a.) Arthur’s demand to reduce electric and magnetic fields (EMFs) is P = 20 – 2 Q, whileRonald’s demand is P = 15 – 3 Q. If the marginal cost of reducing emissions is equal to$15 and is constant, what is the optimal amount of EMF reduction? b.) What Lindahl prices would you charge Arthur and Ronald? What might prevent you fromcollecting these prices?c.) How would your answers change if the marginal cost of reducing emissions was equal to$10 and is constant?d.) What are the consumer surpluses of Arthur and Ronald in c.)?