Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which of the following statements is correct?
A) The EPA should limit both firms' pollution to the same level.
B) The EPA should limit High's pollution level to a lower level than Low's in an attempt to entice High to find more efficient ways to lower its costs.
C) The EPA should allow Low to increase its pollution level and trade with High who would cut its pollution to lower than the required level.
D) The EPA should allow High to increase its pollution level and trade with Low who would cut its pollution to lower than the required level.

Question

Quizplus · Accepted Answer

The EPA should allow High to increase its pollution level and trade with Low, who can reduce pollution at a lower cost. This is an example of a cap-and-trade system, which is economically efficient as it minimizes the total cost of pollution reduction by allowing firms with lower abatement costs to sell permits to firms with higher abatement costs.

Suppose That the EPA Limits the Pollution Level of Two