# Environmental Economics: marginal abatement cost curves

Learning Goal: I’m working on a economics multi-part question and need an explanation and answer to help me learn.

Check Files below for the graph and Questions

Q5 (14 points) Suppose Alliance Energy (Firm A) and Beast Power Corp (Firm B) have the following
marginal abatement cost curves: MAC
= 240 – 2eand MAC= 120 – eB. The government has decided
that they would like to employ a market-based cap and trade solution to the pollution caused by these
firms, so they limit the total allowable emissions to 120 and give each firm 60 permits. Please answer
the following questions.
A. (4 points) Refer to the graph below that includes both firms Marginal Abatement Cost curves
(hint: have firm A’s emissions increase from left to right on the x axis, while firm B’s emissions
increase from right to left). Calculate and label the optimal number of emissions for each firm
on this graph. Show it step by step.

B. (6 points) Describe which firm is going to be buying and selling emission permits as well as how
many permits are being bought and sold. What is the price range for these permits and how
much will the last permit be bought and sold for?
C. (4 Points) Assume every permit is bought and sold at the final permit price calculated in part B.
Compare the total cost for both firms A and B before they traded permits (when they were
given 60 permits each) and again after trading permits. How much did firm A save by trading
permits? How much did firm B save by trading permits?

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