Consider two firms whose marginal costs of production

| November 24, 2016

Consider two firms whose marginal costs of production are

MC(Q1) = 10Q1

MC(Q2) = 5Q2.

Suppose each unit of output produced, Q, results in one unit of emissions, E. Suppose the two firms sell their output in a perfectly competitive market, with perfectly elastic demand at a price of $90. Furthermore, suppose there is a constant external cost of emissions of $10.

1. How much will each firm produce absent any regulation?

2. Suppose a regular would like to impose a quota to achieve the socially optimal level of pollution. What quota should they impose on each firm?

3. What if the regular instead wishes to impose a tax to attain the socially optimal level of emissions. What tax on each unit of emissions should the regulator levy?

4. Now suppose the regular decides to implement a cap and trade system to attain the socially optimal level of emissions via the Coase theorem. Firm 2 has more political clout, however, so the regulator distributes all permits to firm 2.

(a) How many permits should the regulator allocate to firm 2?

(b) Now suppose firm 2 sells permits to firm 1 such that they get to the socially optimal allocation of emissions across the two firms. How many permits would firm 2 sell to firm 1?

(c) What is the minimum price firm 2 would be willing to accept for the permits?

(d) What is the maximum price firm 1 would be willing to pay for these permits?

Get a 30 % discount on an order above $ 50
Use the following coupon code:
Order your essay today and save 30% with the discount code: COCONUTOrder Now
Positive SSL