The graph below can be used to analyze how a market for tradeable pollution allowances might work. Your task is to fill in the table that follows the graph and identify the features indicated by the boxes and call-outs.
Note: “E” is pointing to all of “Red Firm’s Curve,” “G” is pointing to a particular point on “Blue Firm’s Curve.” “A,” “C”, and “D” are each pointing to particular POINT, not to curves or ranges.
In the space to left of each description, please type the letter corresponding to the element on the chart that best fits the description. Leaving the space blank may be an acceptable answer, and it is possible that all letters are not used.
The incremental cost of reducing (abating) pollution by one more unit for the firm that can reduce pollution at the lower cost.
The total reduction in pollution (from both firms) that the program is intended to achieve.
The number of pollution allowances that will be used by the Blue firm.
Unexploited gains from trade if Blue is doing too much and Red is doing too little to abate pollution.
The market-clearing price of pollution allowances.
The point that identifies the optimal level of pollution control by both firms.
The cost to the Blue firm of reducing pollution by the 300th unit of its pollution.
The marginal external cost of abating pollution.
The net social benefit of pollution reduction by the Red firm.
The cost per unit of abatement for each of the firms, when each is providing the optimal level of pollution control.