Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO2 abatement standard. Further assume that the following SO2 abatement cost functions have been estimated by each country
Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO2 abatement standard. Further assume that the following SO2 abatement cost functions have been estimated by each country:
TACUS = 500 + 1.5(AUS)2
MACUS = 3 AUS
TACCAN = 1000 + 3(ACAN)2
MACCAN = 6 ACAN
A. If the countries implement a uniform abatement standard, find the resulting values of TAC and MAC for each nation. Based on these values, is there an economic incentive the two nations to participate in an emissions trading program? Explain.
B. Assuming a trading program is enacted, find the cost savings associated with a cost-effective abatement solution?
C. What must be the price of a tradeable permit to achieve the cost-effective abatement allocation?
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