Econ 548: Homework 11 Name: 1. In a region that must reduce emissions, three pol

Question

Econ 548: Homework 11 Name: 1. In a region that must reduce emissions, three polluters currently emit 20 units each of emissions. The three firms have the following marginal abatement cost functions that describe how marginal costs vary with the amount of emissions each firm reduces. Firm Emissions Firm 1 Reduction Firm 2 Firm 3 Marginal Cost Marginal Cost Marginal Cost $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 $12.00 $1.50 $2.00 $2.50 3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $1.00 $2.00 $3.00 $4.00 S5.00 S6.00 $7.00 $8.00 $9.00 $10.00 10 Suppose this region needs to reduce emissions by 20 units and plans to do it using a form of cap and trade that auctions allowances off to the highest bidder. a. How many allowances will the control authority auction off? Why? Assuming that demand equals supply, what price would be paid for those allowances? Why? b. How many of the allowances would each firm be expected to buy? Why? c. If the control authority decided to use an tax rate would achieve the 20-unit reduction cost-effectively? Why? d. ns tax rather than cap and trade, what

Explanation / Answer

1a) Since they need to reduce emission by 20 units and total emission as of now is 20 units each that means total 20*3=60 units so to reduce emission by 20 units number of allowances need to be auction off=60-20=40Units

b) Cost for 60 allowance should be equal to lowest of the cost for 20 units of Reduction which is from the table so looking at towest cost for each reduction 'firm 2' reduce 10 'firm 3' to 6 and 'firrm 1' to 4 to total cost for that =$75.5 as this will be the amount firm will be willing to shell out for 60 allocation

c)since 1 can reduce only 4 unit emissions if we consider for lowest total cost for emission cut by 20 units it needs to buy 16 allowances similarly 2 needs to buy 10 allowances and 3 needs to buy 14 allowances

Firm 1= 16 allowances

Firm 2= 10 allowances

Firm 3 = 14 allowances

d) Tax rate will be $6 per unit of emission as at this same Marginal cost we can actually reduce total of 20 units of emissions so companies will find it reasonable to reduce emissions till this marginal cost instead of paying taxes.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.