What should be the price level of the tradable permits to achieve the cost-effective solution?
Suppose two point sources are discharging phosphorus into Wisconsin’sFox River and face the following abatement costs for this pollutant:
Point Source 1: TAC1 = 500 + 0.35(A1)2
MAC1 = 0.7A1
Point Source 2: TAC2 = 750 + 1.05(A2)2
MAC2 = 2.1A2,
where A1 and A2 represent the abatement of phosphorus effluents in pounds by Source 1 and Source 2, respectively, and TAC and MAC are measured in hundreds of dollars.
Assume that the state environmental authority has set the total maximum daily load (TMDL) for the Fox River. To achieve this limit, 40 pounds of phosphorus must be abated across the two point sources. Use this information to answer the following questions.
At the cost-effective abatement allocation level, MAC1 = MAC2 = $2,100. Therefore, each permit must be priced equal to the MAC values at this solution point, or at $2,100 per pound of phosphorus abated.
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