The diagram below shows the marginal cost of abatement for each of two firms,A and B.Each firm is initially abating Q 0 units of pollution. FIGURE 17-7
-Refer to Figure 17-7.Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*.The effect will be that

Question

The diagram below shows the marginal cost of abatement for each of two firms,A and B.Each firm is initially abating Q 0 units of pollution.  FIGURE 17-7
-Refer to Figure 17-7.Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*.The effect will be that

Quizplus · Accepted Answer

When a system of tradable pollution permits is introduced, firms can buy or sell permits according to their marginal cost of abatement. At the equilibrium permit price p*, both firms can abate pollution up to their marginal cost of abatement equal to p*. In this case, Firm B has a lower marginal cost of abatement than Firm A for all levels of pollution, so it will sell some of its permits to Firm A. As a result, Firm B will reduce its abatement to the level where its marginal cost of abatement is equal to p*. Firm A will increase its abatement to the level where its marginal cost of abatement is equal to p*. Therefore, Firm B will abate less pollution ( Q₂ ), and Firm A will abate more pollution ( Q₁ ). Hence, the correct answer is C.

The Diagram Below Shows the Marginal Cost of Abatement for Each