 Quiz #2 Wednesday  Homework #4 – Oct. 7th  Exam #2 – Oct. 7th  Extra Credit Oct. 16th  Writing Assignment Due Oct. 23rd

 Firms are allocated X number of permits  A permit represents the right to pollute 1 ton of CO2.  Firms can buy and sell permits. But firm sells their permits, they can no longer pollute and must control their pollution instead.

 Coal Power Plant  15 tons of CO 2 Natural Gas Power Plant 15 tons of CO 2 Suppose we determine that to maintain clean healthy air, we need to reduce emissions by 15 tons total. Who should reduce emissions? By how much?

 Minimizes the control cost between the two sources  Cost Effectiveness Equimarginal Principle Cost of achieving a given level of reduction is minimized when MC 1 =MC 2 =MC 3 =..=MC n Marginal costs of all emitters are equal

 MCC coal = 10 + ½ * Q coal-CO2  MCC ng = 5 + Q ng-CO2  Each firm currently emits 100 tons of CO 2  The government wants to reduce overall emissions to 150 tons of CO 2  Q CO2 = Q coal-CO2 + Q ng-CO2

 Lottery (equitable)  Grandfathering (politically appealing)  Auction (government revenue generated)

 MCC coal = 6 + 1/3 * Q coal-control  MCC ng = 2 + Q ng-control  Each firm currently emits 100 tons of CO 2  The government wants to reduce overall emissions to 140 tons of CO 2  Q control = Q coal-control + Q ng-control

 What is the control cost to each firm?  What is the revenue to the government?

 Quiz #2 Wednesday  Homework #4 – Oct. 7th  Exam #2 – Oct. 7th  Extra Credit Oct. 16th  Writing Assignment Due Oct. 23rd