Below are the marginal abatement costs of three firms (first graph) and the aggr

Question

Below are the marginal abatement costs of three firms (first graph) and the aggregate marginal abatement cost of the three firm industry (second graph). Assume the initial emissions of each firm are as follows: Firm A 2000 Firm B = 2000 Firm C 4000. Assume that the government issues 5800 trade-able permits to Firm C The payoff of each firm is given by the following formula: Payoff Revenue from selling permits Cost of buying permits - Total abatement cost 1. What are the total abatement costs of the industry? 2. What is the payoff of Firm C?

Explanation / Answer

Abatement cost is the cost of reengineering of the production process i.e the cost involved in the removal of unneccassary steps or results in the process of production.

As per the graph shown the total abatement costs of the industry is 10000 as the aggregate marginal cos of all the firms is 10000.

Pay off of the firm C = Revenue from selling permits-cost of buying permits-total abatement cost

Pay off of the firm C=5800-4000-10000=8200

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