Marginal Abatement Cost Function and Marginal Damage Function Questions

Description

Suppose that the Marginal Abatement Cost function and the Marginal Damage function for an
industry are given as follows:

MAC = 80 0.2e
MD = 0.3e

For simplicity here, we are assuming that they are linear. Suppose further that the emissions of
the pollutant in question are governed by a Cap and Trade program.

a. In order for the program to be efficient, how many pollution permits would have to be
issued? Explain.
b. What would be the expected market price of a permit if the efficient number of permits is
issued? Explain.
c. What is total cost of the permits used by firms across the industry? Explain.
d. What is the total abatement cost incurred? Explain.
e. How would the total cost (cost of pollution permits plus abatement cost) to firms compare
to the total cost to firms in the case when an efficient emissions tax is imposed? Is it
higher? Is it lower? If so, why? Explain.

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