Suppose the government issues a fixed quantity, Q*, of tradable pollution permits, each one permitting the emission of one tonne of sulphur dioxide. Use the accompanying figure to help answer the following questions.

a. Explain what determines firms€™ demand for permits,
b. If there is a competitive markets for pollution permits, explain why the equilibrium price of the permit will equal firms€™ marginal abatement cost.
c. Explain why the equilibrium price of permits will fall if polluting firms experience a technological improvement that reduce their marginal abatement costs.
d. One advantage of tradable pollution permits is that they allow the public to express their preference for pollution reduction through the market. What happens if Greenpeace decides to buy a large number of pollution permits and €œretire€ them?

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Quantity of Permits