period, so the only way it can start production is to purchase permits to emit 50 tons of lead.

The total quantity of pollution will decline. However, buying and selling the marketable permits will determine

exactly which firms reduce pollution and by how much. With a system of marketable permits, the firms that

find it least expensive to do so will reduce pollution the most.

Current emissions—permits distributed

free for this amount

How much pollution will these permits

allow in one year?

Firm Alpha

Firm Beta

Firm Gamma

Firm Delta

200 tons

400 tons

600 tons

0 tons

100 tons

200 tons

300 tons

0 tons

Actual emissions one year in the future 150 tons

200 tons

200 tons

50 tons

Buyer or seller of marketable permit?

Buys permits

Doesn’t buy or

Sells permits for

Buys permits

for 50 tons

sell permits

100 tons

for 50 tons

TABLE 12.4 How Marketable Permits Work
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