In the following table are the marginal abatement costs of two firms. Note that an entry in the table indicates the cost of reducing emissions by one unit from the previous level. For example, $300 is the additional abatement cost for firm 1 to reduce its emissions from 3 tons to 2 tons, and $40 is the cost for firm 2 to reduce its emissions from 7 tons to 6 tons. Suppose that the Environmental Protection Agency wants to reduce aggregate emissions of the firms to 10 tons by requiring each firm to reduce its emissions to 5 tons. Explain why this will not be a cost-effective way to reduce aggregate emissions to 10 tons? How much would you allow each firm to emit if you wanted to reduce aggregate emissions to 10 tons cost-effectively?

Firm Emissions

Firm 1

Firm 2

10

$0

$0

9

$40

$10

8

$80

$20

7

$120

$30

6

$160

$40

5

$200

$50

4

$240

$60

3

$260

$70

2

$300

$80

1

$340

$90

0

$380

$100

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