Suppose there are 13 firms in an industry; in the absence of regulation, each of them emits 4 tons of pollution (so aggregate industry emissions are 52 tons). Further, suppose firms are numbered 1 through 13 , and the marginal cost of abat ement (in dollars per ton of pollution) is equal to the firm ’s number ; in other words, the marginal cost of abatement is $1 per ton for firm #1 , $2 per ton for firm #2, etc. The regulator wants to reduce aggregate i ndustry emissions by 20 tons using a system of tradable permits (cap and trade). One permit allows its holder to emit one ton of pollution .
a. How many permits will the regulator issue?
b. What would be the equilibrium price of a permit?
c. Calculate the total cost of pollution abatement for this industry.