In a cap-and-trade program, as polluters buy and sell permits, they move to a situation where
A) all firms' marginal abatement costs are equal to the price of the permits.
B) the demand for permits will exceed the supply.
C) total abatement costs are equal to the total amount spent on permits.
D) the total amount spent on permits is less than the total amount spent on abatement.

Question

Quizplus · Accepted Answer

In a cap-and-trade program, firms aim to minimize their overall cost of reducing emissions. As the demand for permits increases, the price of permits also increases. Eventually, the price of permits reaches a level at which all firms' marginal abatement costs are equal to the price of permits. At this point, all firms have an incentive to buy permits and reduce their emissions to the level specified by the cap. This ensures that the total cost of reducing emissions is minimized while meeting the emissions reduction target.

In a Cap-And-Trade Program, as Polluters Buy and Sell Permits