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?