Homework Answers
ANSWER
(a) The differences in the marginal cost of abatement between firms impact the market price of the permits. A firm with a low marginal cost of abatement can reduce the pollution level more efficiently in comparison to firms that have a high marginal cost of abatement. So with low MC to abatement firms can sell their permits to other firms with high MC to abatement. So the demand for low MC abatement permits will be high which will further decide the price of the permits as high MC abatement firms will buy these permits.
(b) The tradable permits encourage firms to innovate new means of controlling pollution as firms can sell these permits in the market which also provide some benefits and profit.
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