# What is the minimum price firm 2 would be willing to accept for the permits?

Consider two firms whose marginal costs of production are MC(Q1) = 10Q1; MC(Q2) = 5Q2: Suppose each Show more Consider two firms whose marginal costs of production are MC(Q1) = 10Q1; MC(Q2) = 5Q2: Suppose each unit of output produced Q results in one unit of emissions E. Suppose the two firms sell their output in a perfectly competitive market with perfectly elastic demand at a price of \$90. Furthermore suppose there is a constant external cost of emissions of \$10. Now suppose the regular decides to implement a cap and trade system to attain the socially optimal level of emissions via the Coase theorem. Firm 2 has more political clout however so the regulator distributes all permits to firm 2. (a) How many permits should the regulator allocate to firm 2? (b) Now suppose firm 2 sells permits to firm 1 such that they get to the socially optimal allocation of emissions across the two rms. How many permits would firm 2 sell to firm 1? (c) What is the minimum price firm 2 would be willing to accept for the permits? (d) What is the maximum price firm 1 would be willing to pay for these permits? Show less

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