Tradable permits Flashcards
1
Q
The government decides the market is failing
A
Due to the amount of pollution it generates
2
Q
Government imposes a limit on the amount of pollution
A
That can be emitted and produces a volume of permits equal to that limit
3
Q
Theses permits are allocated through auctions or
A
By grandfathering permitts based on previous emission records
4
Q
Over time the gov reduces the supply of permitts
A
Supply curve shifts to left from s1 to s2
5
Q
This increase the market price from p1 to p2
A
Firm only buy permits if cheaper than the marginal cost of abatement
6
Q
This increase in price cause a contraction of demand
A
Quantity of permits bought falls from q1 to q2
7
Q
This reduces the quantity of pollition to socially optimal level
A
Corrects the market failure
