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3.2 Optimal Permit Holdings The initial allocation of 3 permits for EGU 1 and 4 permits for EGU 2 is not an efficient allocation because the marginal abatement costs for EGU 1 and EGU 2 are not equal to one another. The two firms will trade permits with one another until they have equal M CA. Q35) (2 points) How much abatement does each firm carry out when they equate their marginal abatement costs? EGU 1: EGU 2: Q36) (2 points) Draw a solid vertical line on Figure 1 to represent the abatement performed by the two EGUs at the efficient level of abatement. Q37) (2 points) How many permits does each firm hold when their marginal abatement costs are equal? EGU 1: EGU 2: Q38) (4 points) Describe which EGU bought permits and which EGU sold permits to arrive at the equated MAC level of abatement. Based on the structure of the MACs and initial allocation, why would one EGU be willing to pay for the polluting property right and have the other EGU abate instead? Q39) (2 points) What is the total abatement cost for EGU 1 when it abates to the level described in Q35 above? Hint: this is the area of a triangle. Q40) (2 points) What is the total abatement cost for EGU 2 when it abates to the level described in Q35 above? Hint: this is the area of a triangle. Q41) (2 points) Λ dd together the total abatement costs for EGU 1 and EGU 2 to obtain the total abatement cost at the optimal permit allocation

Answer 1

The student's questions pertain to the concept of optimal permit allocation within Environmental Economics, where firms with lower abatement costs can abate more and those with higher costs can buy permits to achieve efficiency in pollution control.

Step-by-step explanation:

The student's questions revolve around the concept of optimal permit allocation in the context of Environmental Economics. Tradable permits are a mechanism to reduce pollution by allowing firms with lower costs of abatement to abate more and firms with higher costs to buy permits. The initial allocation of permits is adjusted as firms trade them to equalize their marginal abatement costs (MAC), ensuring cost-effectiveness in achieving pollution reduction. Over time, permits can become shrinkable, meaning they permit fewer emissions with each passing year, which aligns with the goals of environmental protection. The total abatement costs for each firm after trading would be the area of the triangles under their marginal abatement cost curves up to the quantity of abatement undertaken.

Following this logic and using the given scenarios and information, firms like Firm Gamma might find it more economical to sell excess permits if they can reduce emissions easily and cheaply, while firms like Firm Delta might need to purchase permits to begin production. This system of tradable permits, which might become more restrictive over time, encourages cost-effective pollution reduction and can result in an efficient allocation of resources for environmental protection.