In equilibrium, the price of a transferable emissions permit:
A) is constrained to the amount the government first charged for it.
B) equals the marginal cost of abatement for all firms.
C) equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms.
D) equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms.
E) equals the marginal social cost of emissions.

Question

Quizplus · Accepted Answer

In equilibrium, the price of a transferable emissions permit equals the marginal cost of abatement for all firms. This is because firms will trade permits until the cost of reducing emissions (marginal abatement cost) is equalized across all firms, ensuring the most cost-effective distribution of emissions reduction efforts.

In Equilibrium, the Price of a Transferable Emissions Permit