1. Consider an electric utility that in 2009 had enough SO2 allowances to cover its current emissions. If the utility could have reduced its emissions at a cost of $50 per ton, should it have done so? Why or why not?
2. Suppose that rather than regulating the amount of pollution, the government regulated the amount of pollution abatement. Draw a graph similar to Figure 12.1 except with units of pollution abatement on the horizontal axis and the increasing marginal cost of abatement for two firms (rather than the decreasing marginal value of pollution). The width of the graph now represents the total amount of abatement required. On your graph, shade with horizontal stripes the total cost of abatement if each firm must eliminate the same amount of pollution. Shade with vertical stripes the total cost of abatement if tradable emissions permits allow the firms to reallocate abatement responsibilities as desired.
