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Effect of Lower Cost Device to Tradable Emission Permits

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Assume that the market for tradable emissions permits by power plants has been operating efficiently for several years. An engineering firm then invents a lower cost device for pollution abatement. What happens to the equilibrium market price of a tradable permit? Why? Draw a supply and demand diagram, with a fixed supply of pollution permits, along with your answer. Has the socially optimal amount of pollution increased or decreased? Explain. Create a graph on a spreadsheet program (such as MS Excel).

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Solution Summary

The solution shows the effect of a lower cost device for pollution abatement to the market for tradable emissions permits by power plants. A spreadsheet file showing this effect is shown in the attached file.

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The inflow of the lower cost device pollution abatement will decrease the need for a tradeable emission. permit. This will reduce or shift the demand curved leftward ...

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