Principles of Microeconomics / Unit 11 MIC 1010 worked example, 60 to 90 seconds
Who Sells and Who Buys Permits
The idea
Given each firm's emissions, its abatement cost per ton and an equal permit allocation under a cap, predict the trades. A firm whose abatement cost is below the permit price abates beyond its allocation and sells the surplus; one whose cost is above the price abates nothing and buys. The permit price settles between the low and high abatement costs. Total emissions equal the cap whoever trades; trades decide only who abates, and they cut total cost against a rule making every firm cut equally.
In practice
Worked example: three plants each emit three hundred tons, and abatement costs ten, thirty and sixty dollars a ton. A cap of four hundred fifty tons gives each one hundred fifty permits. At a permit price of thirty dollars, the ten-dollar plant abates all three hundred tons for three thousand dollars and sells its one hundred fifty permits; the sixty-dollar plant abates nothing and buys them; the thirty-dollar plant abates its own one hundred fifty. Total abatement is four hundred fifty tons at a cost of seven thousand five hundred dollars. Making each plant cut one hundred fifty would have cost fifteen thousand.
Where people slip
The cap sets the environmental outcome; the trades set only the cost. And the permit price is not tax revenue: it moves between firms; a government that sold permits rather than giving them away would collect it instead.
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