The diagram below shows the marginal cost of pollution abatement for two firms,Firm X and Firm Y.
FIGURE 17- 4
-If emissions permits are traded freely between profit- maximizing firms in the private market,

Question

The diagram below shows the marginal cost of pollution abatement for two firms,Firm X and Firm Y.
  FIGURE 17- 4
-If emissions permits are traded freely between profit- maximizing firms in the private market,

Quizplus · Accepted Answer

If emissions permits are traded freely between profit-maximizing firms in the private market, the marginal abatement costs will be equalized across firms. This is because firms will compare the cost of reducing pollution to the cost of acquiring permits to continue polluting. As the market price for pollution permits rises, it becomes more profitable for firms with lower marginal abatement costs to reduce their emissions and sell their excess permits to firms with higher marginal abatement costs. This ensures that abatement is achieved at the lowest possible cost, which is the same for all firms.

The Diagram Below Shows the Marginal Cost of Pollution Abatement