The diagram below shows the marginal cost of abatement for each of two firms, A and B. Each firm is initially abating Q0 units of pollution.
FIGURE 17-8
Refer to Figure 17-8. Suppose a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. Firm A will sell permits to Firm B because
◦ the revenue Firm A earns from selling permits (areas 5 + 6) is greater than the cost it incurs from abating more pollution (area 6).
◦ Firm A can buy the permits at a lower price than Firm B.
◦ Firm A's total cost of abating more pollution (area 6) is less than the revenue it earns from selling the permits (area 4 + 5).
◦ Firm A's total cost of abating more pollution (areas 5 + 6) is less than the revenue it earns from selling the permits (areas 4 + 5 + 6).
◦ Firm B has lower costs of pollution abatement than Firm A.
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