What is a cap-and-trade policy? (Be certain to mention marketable ...

[123654777]

What is a cap-and-trade policy? (Be certain to mention marketable permits.) Suppose there are two firms in an area, each emitting tons of sulfur.
 
  The government decides on a target level of 200 tons of sulfur, and gives each firm a permit to emit 100 tons of sulfur. Suppose Firm A is very efficient and can reduce pollution by 100 tons with an abatement cost of 500. Firm B has an older plant, so it will cost Firm B 1,000 to reduce emissions by 100 tons. What will occur with marketable permits?

Question 2

A price cap regulation ________.
 
  A) is illegal
  B) is a price floor
  C) is a price ceiling
  D) encourages a firm to operate inefficiently

[spencer.martell]

Answer to Question 1

A cap-and-trade policy involves the government issuing marketable permits to firms that allow a firm to emit a certain amount of pollution. Firms are allowed to buy and sell these permits.
Firm A can reduce pollution by 100 tons with an abatement cost of 500, while it costs Firm B 1,000 for the same reduction. Marketable permits can be bought and sold. Hence Firm A can reduce its emissions at the cost of 500 and sell its permit to Firm B for some price higher than 500. Firm B has an incentive to buy the permit for any price less than 1,000 rather than reduce its emissions at the cost of 1,000. Hence with marketable permits, Firm A will sell its permit to Firm B.

Answer to Question 2

C

[123654777]

Thank you

[spencer.martell]

No problemo