Figure 17-5 The Efficiency of a Cap-and-Trade System
amount of emissions consistent with the same total amount of pollution
abatement ( in the figure). What should each of the firms do?
Should they abate more pollution, or less?
A cap-and-trade system is an efficient way to achieve a given amount of
pollution abatement. As in Figure 17-3 and Figure 17-4 , Firm A has
lower marginal costs of pollution abatement than does Firm B. If each
firm abates pollution by units, the firms’ marginal costs are not
equated and the pollution abatement does not minimize costs; it is
inefficient.
All firms can be better off if they are issued tradable pollution permits
even though total pollution abatement remains unchanged. The price of
the permits reflects firms’ marginal benefit of pollution abatement. If the
price is Firm A would sell X permits to Firm B. Firm B would reduce its
abatement to and reduce its costs by area (1), while Firm A would
increase its abatement to and increase its net earnings by area (2).
Since the marginal costs of abatement are then equated across firms, this
is efficient pollution abatement.
= 2 ×Q∗ Q∗p∗,
QB
QA