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 B will buy permits from Firm A because
◦ Firm B has lower costs of pollution abatement than Firm A.
◦ its total savings from abating less (areas 1 + 2 + 3) exceed the cost of buying the permits (areas 2 + 3).
◦ its total cost of abating less (areas 1 + 2 + 3) exceeds the cost of buying the permits (areas 2 + 3).
◦ its total savings from abating less (areas 1 + 2 + 3) exceed the total costs of Firm A abating more (area 6).
◦ Firm B can buy the permits at a lower price than Firm A.
Diagram of a typical fossil-fueled power plant
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