ECON/AREC

240
Summer 2014
Homework 2: Due Monday June 9th

Marginal Abatement Costs

10000
9000
8000
7000 Firm 1
6000 Firm 2
5000 Firm 3

4000 Firm 4
Firm 5
3000
Firm 6
2000
1000
0
0 500 1000 1500 2000 2500 3000 3500 4000


1. The six firms in the in-class experiment had the marginal abatement cost curves
shown in the figure above. Use the figure to explain why an emission standard that
requires all firms to reduce emissions to 1,480 tons/month is not cost effective. In
particular, what condition does not hold? Be specific and explain your answer.











2. Starting from this allocation, suppose the permit price was $4,500. Who would buy
permits and who would sell them? Would you expect the supply of permits to equal
the demand for permits? (Use information from the graph to answer the question.)


















3. Suppose the permit price was $1,500. Who would buy permits and who would sell
them?






4. The following graph shows the abatement cost per firm under the two policies
considered in class: the uniform standard and the cap and trade system with an
equilibrium permit price of $3200. From the graph, it is tempting to conclude
that firm 1 is better off under the standard. Is that true? Explain your answer.

Abatement Costs (in million dollars)

Firm 6

Firm 5

Firm 4
C&T
Firm 3 Standard

Firm 2

Firm 1

0 2 4 6 8 10