Marginal Abatement Cost Function and Marginal Damage Function Questions


Suppose that the Marginal Abatement Cost function and the Marginal Damage function for anindustry are given as follows:MAC = 80 – 0.2eMD = 0.3eFor simplicity here, we are assuming that they are linear. Suppose further that the emissions ofthe 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 beissued? Explain.b. What would be the expected market price of a permit if the efficient number of permits isissued? 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 compareto the total cost to firms in the case when an efficient emissions tax is imposed? Is ithigher? Is it lower? If so, why? Explain.

Marginal Abatement Cost function

emission tax

Total abatement cost

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