Chapter 11: Problem 32

Will a system of marketable permits work with thousands of firms? Why or why not?

Short Answer

Expert verified

A system of marketable permits, or cap-and-trade system, can work effectively with thousands of firms participating. The advantages of large-scale implementation include economies of scale, flexibility, and a more equitable distribution of cost burdens. With a greater number of participants, pollution reduction becomes more cost-effective, and a well-functioning market for permits allows for efficient trading between firms. However, proper monitoring, regulatory oversight, and enforcement are critical for success in such large-scale systems.

Step by step solution

Understanding Marketable Permits

A system of marketable permits, also known as a cap-and-trade system, is an environmental policy tool that aims to reduce pollution. It sets a limit or a cap on the amount of pollutants that firms can emit. Regulators issue permits, with each permit allowing a firm to emit a certain amount of pollution. Firms that reduce their emissions below their allocated permits can sell their unused permits to other firms that may find it more difficult or costly to reduce their emissions.

Large-scale Implementation with Thousands of Firms

Now that we understand the basics of marketable permits, we can discuss whether or not it would work with thousands of firms. The answer is yes, a cap-and-trade system can function with thousands of firms participating. In fact, having a large number of firms engaged in the system can provide several advantages, including the following:

Economies of Scale

First, with a greater number of participants, the likelihood increases that some firms will find it less expensive to reduce their emissions, therefore making pollution reduction more cost-effective overall. This creates economies of scale, with the cost of reducing emissions per unit decreasing as the number of participating firms increases.

Flexibility and Efficiency

Second, a larger number of firms ensures a well-functioning market for permits, which allows firms to trade permits with one another, creating flexibility and increasing overall efficiency. The ability to buy and sell permits means that firms can make the most cost-effective choices for meeting their environmental targets.

Distribution of Cost Burdens

Third, having thousands of firms in the system allows for a more equitable distribution of the cost burdens associated with pollution reduction. With more participants, the costs of complying with the regulations are spread across a larger number of firms, reducing the financial impact on individual firms.

Conclusion

In conclusion, a system of marketable permits can work effectively with thousands of firms participating. The advantages of large-scale implementation include economies of scale, flexibility, and a more equitable distribution of cost burdens. However, it is important to note that proper monitoring, regulatory oversight, and enforcement are critical for the success of a cap-and-trade system involving thousands of firms.

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