Question

Will a system of marketable permits work with thousands of firms? Why or why not?

Short answer

In conclusion, a marketable permits system can work efficiently with thousands of firms, providing benefits like increased cost savings, liquidity, and stability. However, potential challenges such as administrative complexity, inequality, and market uncertainty must be addressed to ensure the efficient functioning of the system.

Step-by-step solution

Introduction to Marketable Permits

Marketable permits, also known as cap-and-trade schemes, are a way to regulate pollution and environmental externalities. In such a system, a regulatory authority sets a cap on the total amount of emissions/pollution allowed, and then distributes permits to firms within the industry. Each permit represents the right to emit a certain amount of pollution. Firms can then trade these permits among themselves, allowing for flexibility in achieving the cap level; companies that can efficiently reduce emissions will sell their excess permits to those who find it more costly to do so. The goal of marketable permits is to achieve the desired level of pollution reduction at the lowest possible cost to society.

Scalability to Thousands of Firms

In theory, a marketable permit system can work with any number of firms, including thousands of firms. The efficiency of the trading system relies on the law of supply and demand, where firms with low abatement costs will sell permits to those with high abatement costs. With a large number of firms in the market, there is a higher likelihood of a competitive and efficient permit trading market.

Benefits of a Large Tradable Permits Market

With thousands of firms participating in a marketable permit system, there are several potential benefits. These include: 1. Greater potential for cost savings: With a larger number of firms, there is a higher likelihood that the firms will have diverse abatement costs, which can lead to a more efficient distribution of permits and larger cost savings. 2. Increased liquidity: A higher number of firms trading permits will result in a more active and liquid permits market. A liquid market allows firms to easily buy and sell permits, improving the overall market efficiency. 3. Enhanced stability: A larger market with numerous firms can reduce the risk of collusion or market manipulation, ensuring that the market remains competitive and efficient.

Potential Challenges with a Large Tradable Permits Market

Despite the potential benefits of using marketable permits in a large industry, there may also be some challenges: 1. Administrative complexity: Managing and enforcing a marketable permit system with thousands of firms can be complex. Regulators would need to establish a robust monitoring and enforcement mechanism to effectively control the emissions and trading process. 2. Possible inequality: The initial allocation of permits may prioritize larger or more politically influential firms, potentially disadvantaging smaller firms. 3. Market fluctuations and uncertainty: Large-scale market fluctuations due to permit prices may create uncertainty for firms regarding investment in emissions reduction technology.

Conclusion

So, will a system of marketable permits work with thousands of firms? The answer is yes, it is possible for a marketable permits system to work efficiently in an industry with thousands of firms. Implementing such a system in a large industry would generate benefits, such as increased cost savings, liquidity, and stability. Nonetheless, challenges would arise and need to be addressed, such as administrative complexity, potential inequalities, and market uncertainty.