Uniformly Mixed Pollutants – a pollutant emitted by many sources in a region resulting in relatively uniform concentration levels across the region (SOx, CO2) Non-uniformly mixed pollutants – pollutants that have different effects in different areas, depending on where they are emitted (water pollution from factories, sewage, and runoff from agriculture)
Firms are allocated X number of permits A permit represents the right to pollute 1 ton of CO2. Firms can buy and sell permits. But firm sells their permits, they can no longer pollute and must control their pollution instead.
Coal Power Plant 15 tons of CO 2 Natural Gas Power Plant 15 tons of CO 2 Suppose we determine that to maintain clean healthy air, we need to reduce emissions by 15 tons total. Who should reduce emissions? By how much?
Minimizes the control cost between the two sources Cost Effectiveness Equimarginal Principle Cost of achieving a given level of reduction is minimized when MC 1 =MC 2 =MC 3 =..=MC X Marginal costs of all emitters are equal
MC coal = 10 + ½ * Q coal-CO2 MC ng = 5 + Q ng-CO2 Each firm currently emits 100 tons of CO 2 The government wants the to reduce overall emissions to 150 tons of CO 2 Q CO2 = Q coal-CO2 + Q ng-CO2
MC coal = 6 + 1/3 * Q coal-control MC ng = 2 + Q ng-control Each firm currently emits 100 tons of CO 2 The government wants the to reduce overall emissions to 140 tons of CO 2 Q control = Q coal-control + Q ng-control
What is the control cost to each firm? What is the revenue to the government?