The Diagram Below Shows the Marginal Cost of Abatement for Each

question 97

Multiple Choice

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 17-7
-Refer to Figure 17-7.Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*.The effect will be that

• A)Firm B will sell permits to Firm A,pollute less,and reduce its costs by the area 1; Firm A will buy permits from Firm B,pollute more,and increase its costs by the area 4.
• B)Firm B will sell permits to Firm A,pollute more,and reduce its costs by the area 1; Firm A will buy permits from Firm B,pollute less,and increase its earnings by area 4.
• C)Firm B will buy permits from Firm A,pollute less,and increase its costs by the areas 2 + 3; Firm A will sell permits to Firm B,pollute more,and reduce its earnings by areas 4 + 5.
• D)Firm B will buy permits from Firm A,pollute more,and reduce its costs by the area 1; Firm A will sell permits to Firm B,pollute less,and increase its earnings by area 5.

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