UMass

IN

RESEC 262 Summer

5) In the graph below are the marginal abatement costs of two firms, A and B.

Suppose that they face the same emissions tax.

Marginal abatement costs for firm A

E

Problem

Marginal abatement costs for firm B

Emissions

a. In the graph indicate each firm's choice of emissions. Label these

choices as EA and EB. [1 point]

b. Use your answer to (a) to explain why an emissions tax will be a cost-

effective policy tool. Three or four sentences should be enough. [2

points]