Baseline – assume the firm is currently not paying for emissions and is emitting 20 tons per year.
Give Property Rights to the Firm
The firm has rights to supply emission-reductions (r tons/yr):
Let the firm’s cost of e-reductions be:
Total costs of e-reductions = 0.5r2
Marginal abatement cost of e-reductions = r
The runner benefits from e-reductions, creating demand:
Total benefits of e-reduction = 80r – 2r2
Marginal benefits of e-reduction = 80 – 4r
The cost-minimizing level for r for the firm is 0
The cost-maximizing level for r for the runner is 40
The efficient level of r is 20
Assume the firm and runner agreed to the same efficient price for all reductions:
What is the efficient price of r?
options:
a) price=$0
b) price=$16
c) price=$12
d) price+$20
Assume the firm and runner agreed to the same efficient price for all reductions:
What are the runner’s total benefits from r*?
a) Total benefits = $768
b) Total benefits = $256
c) Total benefits = $400
d) Total benefits = $1,024
