Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?
A) No, it would raise the cost of pollution abatement.
B) Yes, it would lower the cost of pollution abatement.
C) It is impossible to say whether this would or would not be an efficient trade.
D) There is no incentive for Alex and Tyler to trade.

Question

Quizplus · Accepted Answer

This would be an efficient trade because Tyler values emitting one pound of carbon dioxide less than Alex's willingness to pay for emitting one pound of carbon dioxide. By allowing them to trade, the total cost of pollution abatement would decrease since Alex can emit more carbon dioxide at a lower cost, and Tyler would also make a profit.

Suppose the Government Limits the Amount of Pollution from Cars