The diagram below shows the marginal cost of abatement for each of two firms,A and B.Each firm is initially abating Q 0 units of pollution.
FIGURE 17-7
-Refer to Figure 17-7.Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p∗.Firm A will sell permits to Firm B because
A) Firm Aʹs total cost of abating more pollution (areas 5 + 6) is less than the revenue it earns from selling the permits (areas 4 + 5 + 6) .
B) Firm B has lower costs of pollution abatement than Firm A.
C) Firm A can buy the permits at a lower price than Firm B.
D) the revenue Firm A earns from selling permits (areas 5 + 6) is greater than the cost it incurs from abating more pollution (area 6) .
E) Firm Aʹs total cost of abating more pollution (area 6) is less than the revenue it earns from selling the permits (area 4 + 5) .
Correct Answer:
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