What is the response of a potential polluter in a marketable permit system? To answer these questions it will help to look back at Figures 13.2 and 13.3.
(a) What happens to the emissions standard the firm must meet if it buys a permit?
(b) Suppose that the firm is compliant, as in Figure 13.2, and it is offered the right to buy or sell one unit of pollution (move its standard by one unit). If the market rate for permits is less than the expected penalty, what will it do and why?
(c) Suppose that the market rate is higher than the expected penalty. Now what does it do?
(d) Now suppose the firm is noncompliant as in Figure 13.3. If the market price of permits is $1.04, what will the firm do?
(e) Instead the market price is $0.50. What does the firm do?