Consider a market with 20 firms who act as price takers in all markets. Each firm is

producing some good, and its activity produces 10 units of pollution. For the pur-

poses of this problem, assume that the firm cannot change its production activity,

but it has a mechanism by which to directly abate its own emissions, at a total cost

of C(ai) = αiai where αi is a constant for each firm. Five firms have αi = 1. Five

other firms have αi = 4. The remaining ten firms have αi = 8. After abatement,

net emissions for each firm are ei = 10 − ai, where ei cannot go below zero (i.e.,

each firm can abate a maximum of 10 units).

As a first policy, consider an emissions tax of t. Each firm must pay a tax on any

emissions they do not abate, so each firm must pay tei = (10 − ai)t. Assume that

the revenue from the tax is put into the general budget and spent in unrelated

markets.

1. Draw the abatement supply curve in this market, which describes the total amount

of abatement that corresponds to the tax rate. (Put abatement on the horizontal

axis. You may draw by hand and upload an image. Be sure to label key values.)

2.How many units of abatement occur if the tax rate is $3 per unit of emissions?

3.What is the total cost of abatement across all firms under a $3 tax?

Consider a market with 20 firms who act as price takers in all markets.