With this policy in place, what is the marginal benefit
the firms of abating one extra tonne of GHGs?
d. In this situation, explain which firm sells permits and
why, and which firm purchases permits, and why. After
trading, what is each firm’s MC of abatement?
e. With this cap-and-trade system in place, what is the total
combined cost of abating the 200 tonnes of GHG
emissions?
f. If you were advising the government, which pollution-
reduction policy would you recommend it adopt, and
why?
17. Refer to the diagram for Study Exercise 16, which shows the
marginal cost of abatement of GHGs for each of two firms,
LoCost Inc. and HiCost Inc. The government has imposed a direct
regulatory control requiring each firm to abate 100 tonnes of
GHGs.
a. With the direct regulatory control in place, what is the
MC of abatement for each firm?
b. In this situation, what is the total combined cost of
abating 200 tonnes of GHGs? (Hint: For each firm the
total cost of abating X tonnes is given by the area under
its MC curve up to X.)
c. Now suppose the government replaces the direct
regulatory control with an emissions tax of $30 per tonne.
With this policy in place, what is the marginal benefit
the firms of abating one extra tonne of GHGs?
d. With the emissions tax in place, explain how each of the
