If two firms have different abatement costs, in a system of marketable pollution permits
A) the firm with lower abatement costs will sell permits to the firm with higher abatement costs.
B) the firm with lower abatement costs will purchase permits from the firm with higher abatement costs.
C) no voluntary exchange that makes both firms better off is possible.
D) voluntary exchange will occur, but it is impossible to determine which firm will be the seller and which will be the purchaser.

Question

Quizplus · Accepted Answer

The firm with lower abatement costs will find it easier and cheaper to reduce emissions compared to the firm with higher abatement costs. As a result, the firm with lower abatement costs will have surplus permits that can be sold to the firm with higher abatement costs, resulting in an efficient allocation of resources.

If Two Firms Have Different Abatement Costs, in a System