Question

If a government wants to efficiently reduce a widespread negative externality like air pollution, it must know the costs of pollution abatement of the individual polluters. However, this information is difficult to obtain directly. Tradeable emissions permits are one way to solve the asymmetric information problem affecting pollution abatement efforts.
a. Because the permits are tradeable, firms with ___ abatement costs will sell some of their permits to firms with ___ abatement costs.
b. Now consider that even after a firm has sold its permits, it must still reduce its pollution output.
Since those who sell their permits would have ___ abatement costs, the negative externality is reduced at ___ possible cost to society.

Answer 1

Answer:

a). lower, higher

b). lower, lower

Explanation:

The abatement costs may be defined as the cost that is borne by a firm or an organization when it is necessary to remove any undesirable nuisances or any negative byproducts of the process that is created during the production process. It is cost incurred in eliminating a negative externality such as environmental externality like pollution.

In the context, for solving the pollution abatement cost, the tradeable emissions permits as they are tradebale, an organization with a lower abatement cost sells the permits to the higher abatement cost firms.

Even after selling, the firm still have to reduce the pollution output, then the firm that sold the permit would  have lower abatement cost and  the negative externality is also reduced at the lower possible cost.