receives permits to allow this level of pollution. However, these permits are shrinkable, and next year the

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12.3 • Market-Oriented Environmental Tools 289

permits allow the firms to emit only half as much pollution. Let’s say that in a year, Firm Gamma finds it easy

and cheap to reduce emissions from 600 tons of lead to 200 tons, which means that it has permits that it is not

using that allow emitting 100 tons of lead. Firm Beta reduces its lead pollution from 400 tons to 200 tons, so it

does not need to buy any permits, and it does not have any extra permits to sell. However, although Firm Alpha

can easily reduce pollution from 200 tons to 150 tons, it finds that it is cheaper to purchase permits from

Gamma rather than to reduce its own emissions to 100. Meanwhile, Firm Delta did not even exist in the first

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