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Effect of Lower Cost Device to Tradable Emission Permits

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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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 ...

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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