MC
200

MCB = 3ZB
MCA = 3ZA
100

75











5
10
15
20
25
30
35
40
Z
Pollution abatement
Figure 7.1 Marginal abatement cost functions for the two firms.
Ambient pollution
levels
Emissions output
Quantity of goods produced
Production technique
Inputs used
Figure 7.2a The pollution process
Location of
emissions
Ambient pollution
requirements
Zoning
Emissions
licenses
Output
quotas
Technology controls
Input restrictions
Figure 7.2b Command and control instruments
Marginal damage
Marginal benefit
(before tax)
*
Marginal
benefit (after
tax)
0
M*
M̂
M
Figure 7.3 An economically efficient emissions tax.
Marginal cost of
abatement
*
Marginal benefit of
abatement
0
Z* =
M̂  M*
Figure 7.4 The economically efficient level of emissions abatement.
Z
Z
Marginal damage
Marginal benefit
(before tax)
*
0
S3
S5
S6
S4
M*
S2
S1
M̂
Figure 7.5 Emissions tax and abatement subsidy schemes: a comparison.
M
Marginal abatement cost
(aggregate)
*
0
M*
M̂
Figure 7.6 The determination of the market price of emissions permits.
M
Demand for permits
Supply of permits
*
0
EP*
Emission permits
(EP)
Figure 7.7 The determination of the market price of emissions permits: free initial
allocation case.
Marginal abatement cost
Figure 7.8: Efficient abatement with two firms and marketable permits
200
180
MC(B)
160
140
Equilibrium permit price =
Marginal abatement cost for
each firm = 75
120
MC(A)
100
MC(INDUSTRY)
80
60
40
20
0
0
5
10
15
20
25
Emissions abatement, Z
30
35
40
45
Required industry wide abatement
50
Figure 7.9 Dynamic incentives under emissions tax controls.
£
MC1
MC2



0
Z1*
Z2*
Z
Ci
i •
Ci  αi  βi M*i  δi M*i2
M*i
0
•
M*i
 M̂i
Figure 7.10 The firm’s abatement cost function.
M*i