tradable pollution permits

Question 1

what are tradable pollution permit used for

Answer 1

used to resolve pollution based externalities

Question 2

effect of tradable pollution permit on graph

Answer 2

-straight supply curve set at q star, normal demand curve

Question 3

how tradable pollution permits work

Answer 3

-governments set cap at q star
-they issue permits to match cap
-firms make decision based on cost: green tech investment, buy spare permits
-enforcement
-pollution at social optimum, allocative efficiency
-always beneficial in long run to invest: higher profits, not burdened by future caps

Question 4

issues with tradable pollution permits

Answer 4

-cost of enforcement
-difficult for governments to set at the right level
-unintended consequences (carbon leaks, moving to other countries)
-difficult to ensure international cooperation