There are 3 firms producing mercury emissions, with heterogeneous marginal abatement costs:

MAC1 = 10*A1

MAC2 = 20*A2

MAC3 = 30*A3 Initially, each firm emits 30 tons/year, but the EPA (Environmental Protection Agency) determines that the environment’s “carrying capacity” is just 60 tons/year total.

a) Suppose the EPA adopts a command-and-control regulation permitting each firm to emit just 20 tons per year. i) Calculate the cost of compliance for each of the 3 firms

ii) Total these to arrive at the industry-wide cost of compliance

b) Suppose the EPA issued trade able permits for 20 tons/year to each firm.

i) How much abatement will each firm end up undertaking, after trade in permits is complete? (Fractional units are okay)

ii) How many permits will each firm end up holding? (Fractional units okay)

iii) What is the total cost of all the abatement undertaken?

iv) What is the “price” of a permit?

c) If the government imposed a “green tax” of $X/ton, where "X" is the permit price you derived in part (b)(iv) above?

i) how much would total emissions be?

ii) how much would the private cost of compliance be for each firm, and for the industry altogether?

iii) how much would the social cost of compliance be?