Suppose Jones' company and Smith's company both pollute. Under a system of marketable pollution permits, which of the following must be TRUE in order for Smith and Jones to benefit from trading the right to pollute?
A) Smith and Jones must be able to reduce pollution at exactly the same cost.
B) Smith and Jones must have different abatement costs.
C) Smith and Jones must have a social conscience and must be devoted to pollution abatement.
D) The government must direct Smith and Jones toward beneficial trades.

Question

Quizplus · Accepted Answer

The key to benefiting from trading pollution permits lies in the difference in abatement costs. If Smith can reduce pollution at a lower cost than Jones, Smith can sell his extra permits to Jones, who faces higher costs to reduce pollution. This way, Smith profits from selling the permits, and Jones saves money by buying permits instead of incurring higher abatement costs. This difference in costs creates an incentive for trade, making it beneficial for both parties.

Suppose Jones' Company and Smith's Company Both Pollute