What is the highest price that a firm would be willing to pay for one marketable pollution permit?
A) an amount equal to the purchasing firm's marginal abatement cost
B) an amount equal to the social benefit of pollution reduction
C) an amount determined by supply and demand in the market
D) an amount equal to the selling firm's marginal abatement cost

Question

Quizplus · Accepted Answer

A firm would be willing to pay for one marketable pollution permit an amount equal to its marginal abatement cost, which represents the cost of reducing one unit of pollution. This is because if the firm can reduce its pollution for less than the price of the permit, it will do so, while if the cost of reducing the pollution is higher than the permit price, it will buy the permit instead of reducing its emissions. Therefore, the highest price the firm is willing to pay for a permit is equal to its marginal abatement cost, as this reflects the amount the firm would save by purchasing the permit instead of reducing its pollution. The other options are incorrect: B refers to the social benefit of pollution reduction, which is not necessarily the same as the cost of reducing pollution for the firm; C refers to the market price of permits, which is not necessarily equal to the firm's willingness to pay; and D refers to the cost of reducing pollution for the selling firm, which is not relevant for the buying firm's decision.

What Is the Highest Price That a Firm Would Be