Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $10 m
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Answer:
The incomplete part of the question is "Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of $1 million per year. If the permits are not tradable, what will be the cost of eliminating half of the pollution? If permits cannot be traded, then the cost of the pollution reduction will be $1 million per year." The full question is attched as picture as well
1) Tradable permit system
Then lower MAC firm will abate the all pollution units
Then as MAC1 = $250, MAC2 = $275
Firm 1 = Consolidated electric
Firm 2 = Commonwealth utility
Then 1 will sell all permits to 2, at a price between $250 & $275.
So total cost of abatement of 20 units = MAC1 * 20
= $250 * 20 Unit
= $5,000
2) Non-tradable permits
Total cost = MC1*10 + MC2*10
= $2,500 + $2,750
= $5,250
