The diagram below shows the marginal cost of abatement for each of two firms,A and B.Each firm is initially abating Q₀ units of pollution.

The diagram below shows the marginal cost of abatement for each of two firms,A and B.Each firm is initially abating Q<sub>0</sub> units of pollution. FIGURE 17-7 -Refer to Figure 17-7.Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*.The effect will be that A)Firm B will sell permits to Firm A,pollute less,and reduce its costs by the area 1; Firm A will buy permits from Firm B,pollute more,and increase its costs by the area 4. B)Firm B will sell permits to Firm A,pollute more,and reduce its costs by the area 1; Firm A will buy permits from Firm B,pollute less,and increase its earnings by area 4. C)Firm B will buy permits from Firm A,pollute less,and increase its costs by the areas 2 + 3; Firm A will sell permits to Firm B,pollute more,and reduce its earnings by areas 4 + 5. D)Firm B will buy permits from Firm A,pollute more,and reduce its costs by the area 1; Firm A will sell permits to Firm B,pollute less,and increase its earnings by area 5.

FIGURE 17-7
-Refer to Figure 17-7.Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*.The effect will be that
A)Firm B will sell permits to Firm A,pollute less,and reduce its costs by the area 1; Firm A will buy permits from Firm B,pollute more,and increase its costs by the area 4.
B)Firm B will sell permits to Firm A,pollute more,and reduce its costs by the area 1; Firm A will buy permits from Firm B,pollute less,and increase its earnings by area 4.
C)Firm B will buy permits from Firm A,pollute less,and increase its costs by the areas 2 + 3; Firm A will sell permits to Firm B,pollute more,and reduce its earnings by areas 4 + 5.
D)Firm B will buy permits from Firm A,pollute more,and reduce its costs by the area 1; Firm A will sell permits to Firm B,pollute less,and increase its earnings by area 5.

When Firms in an Industry Have Fully Internalized a Production

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