Two firms can control emissions at the following marginal costs: MC1 = 200q1, MC2 = 100q2, where q1 and q2 are the amount of emissions reduced by the first and second firm. Assume with no control each firm would emit 20 units or a total of 40 units.

a. Compute the allocation that would result if 10 tradable effluent permits were given to the second source and 9 were given to the first source. What would be the market permit price? How many permits would each source end up with after trading? What would the net permit expenditure be for each source after trading?

b. Suppose a new source entered the area with a constant marginal cost of control equal to $1,600 per unit of emissions reduced. Assume further that it would add 10 units in the absence of any control. What would be the resulting allocation of control responsibility if the cap of only 19 units of effluent allowed were retained? How much would each firm clean up?
What would happen to the permit price? What trades would take place?