d. In part (c), show on the diagram how much pollution
each firm will choose to abate.
e. Is it possible to reduce the total cost of the amount of
abatement being done in part (d)?
16. The diagram below 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 a cap-and-trade system with the
same total intended abatement. Emissions permits are
issued to each firm. Suppose also that once trading in
permits begins the equilibrium price is $30 per tonne.