Assume that the current price of a marketable permit to emit one ton of sulfur dioxide is $60.For firm A,the marginal cost of reducing one ton of sulfur dioxide is $50.For firm B,the marginal cost of reducing one ton of sulfur dioxide is $70.Under a tradable-permit scheme:
A)both firms will buy a permit and emit one more ton of sulfur dioxide.
B)firm A will buy a permit and emit one more ton of sulfur dioxide,whereas firm B will reduce its emissions of the gas by one ton.
C)firm B will buy a permit and emit one more ton of sulfur dioxide,whereas firm A will reduce its emissions of the gas by one ton.
D)both firms will reduce their emissions of sulfur dioxide by one ton.

Question

Quizplus · Accepted Answer

Under a tradable-permit scheme, Firm A will buy a permit since the marginal cost of reducing one ton of sulfur dioxide ($50) is less than the current price of a permit ($60). Therefore, it is cheaper for Firm A to buy a permit instead of reducing its emissions by one ton.
On the other hand, Firm B's marginal cost of reducing one ton of sulfur dioxide ($70) is higher than the current price of a permit ($60). Therefore, it is cheaper for Firm B to buy a permit instead of reducing its emissions by one ton. Hence, Firm B will buy a permit and emit one more ton of sulfur dioxide, whereas firm A will reduce its emissions of the gas by one ton.

Assume That the Current Price of a Marketable Permit to Emit