Per the Kyoto Protocol, European countries have targeted a reduction of CO2 emissions. There are two main types of coal-fire plants in the EU: one type is designed to be able to be retrofitted with abatement equipment at a lower cost than the other type. The EU government has given its economists the job of figuring out the least costly way to reach the goal of reducing pollution by 120 tons of CO2 this year. The marginal abatement costs for each type of plant are as follows: Type 1: MC1 = 5q1 Type 2: MC2 = 3q2 where q1 is the total tons of CO2 removed by type 1 plants where q2 is the total tons of CO2 removed by type 2 plant Suppose the EU now institutes a cap and trade system. Each permit is good for one ton of carbon abatement. The total cap is 120 tons. Each of the two plant types receives an equal amount of permits.
a. What is the market price for permits?
b. Who buys permits, and who sells them? How many does each trade? Show on a graph. Label the supply and demand for permits.