The figure below shows the marginal control costs for the only two firms in an i
ID: 1102120 • Letter: T
Question
The figure below shows the marginal control costs for the only two firms in an industry. The government has determined that emissions need to be reduced by 20 tons.
Suppose the government uses a cap and trade policy to reach these emissions reductions. It initially allocates permits so that each firm (before trade) would have to reduce pollution by 10 tons. Based on the firms' MCC, firm_____(1 or 2) will want to buy permits from the other firm.
When trading takes place, this firm will buy________?permits from the other firm.
Explanation / Answer
Firm 1
Twice