it divides a number of permits allowing only this quantity of pollution among the firms that emit that pollutant.

The government can sell or provide these permits to pollute free to firms.

Now, add two more conditions. Imagine that these permits are designed to reduce total emissions over time.

For example, a permit may allow emission of 10 units of pollution one year, but only nine units the next year,

then eight units the year after that, and so on down to some lower level. In addition, imagine that these are

marketable permits, meaning that firms can buy and sell them.

To see how marketable permits can work to reduce pollution, consider the four firms in Table 12.4. The table

shows current emissions of lead from each firm. At the start of the marketable permit program, each firm

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

Access for free at openstax.org
12.3 • Market-Oriented Environmental Tools 289
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