Marketable permits Suppose there is a marketable permit pollution control progra

Question

Marketable permits Suppose there is a marketable permit pollution control program. A firm is required to hold one permit for each ton of pollution is produces. Suppose the firm is currently producing eight tons of pollution and holding five permits. It can buy and sell permits for 15 dollars each. Its marginal costs of abatement are given by the following table. If the firm is optimizing how many permits does it buy and sell. How much abatement does it do? If the marginal cost of a ton of pollution from the factory was equal to 20 dollars, What is the socially efficient level of abatement? If there was no marketable permits program, what would the optimal pigovian tax be?

Explanation / Answer

i.

The firm should stay in the optimizing level till MC < $15.

It is in 1 amount of abatement, where MC = $10 < $15.

Therefore, the firm should buy (8 - 5 =) 3 permits and sell 1 permit.

The firm’s abatement is 1 ton of pollution.

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