1. In the graph below are the marginal abatement costs of two firms, A

and B, operating under a competitive transferable discharge permit

policy. Suppose that the equilibrium price of permits is p*.

$

p*

Marginal abatement costs for firm A

Marginal abatement costs for firm B

Emissions

Permits

a. In the graph indicate each firm's choice of emissions and permits.

Label these choices as e, and eg for emissions, and q and q3 for

permits. [2 points]

b. Use your answer to (a) to explain why a competitive transferable

discharge system will be a cost-effective policy tool. [2 points]