a). Use the cap-and-trade model to explain in technical detail the two outcomes of abatement using CO2 permits: the 50:50 split and the cap-and-trade equilibrium. In your answer, show the gains from trade between the two firms.
b). Describe the way a cap-and-trade policy works to someone who has not studied economics. How would you respond to their concerns that the policy is likely to be ineffective and unfair to producers?

Sample Solution