The diagram below shows a market for tradable pollution permits. FIGURE 17-8
-Refer to Figure 17-8,which depicts the market for tradable pollution permits.The equilibrium price p*

Question

The diagram below shows a market for tradable pollution permits.  FIGURE 17-8
-Refer to Figure 17-8,which depicts the market for tradable pollution permits.The equilibrium price p*

Quizplus · Accepted Answer

The equilibrium price p* is determined at the intersection of the marginal abatement cost curve and the demand curve for pollution permits. At this price, each profit-maximizing firm will purchase pollution permits up until the point where the marginal benefit of the permits equals the marginal cost of abatement (i.e. the marginal abatement cost). Therefore, choice B is the correct answer. Choices A, C, D, and E are incorrect because they do not accurately describe the determination of the equilibrium price in a market for pollution permits.

The Diagram Below Shows a Market for Tradable Pollution Permits