Question

What is a marketable permit and what incentive does it provide for a firm to account for external costs?

Short answer

• Marketable permit is a type of grant given by government to a firm, allowing the certain quantity of pollution that the firm can emit.
• Marketable permit gives a firm an incentive to reduce cost of pollution.

Step-by-step solution

Step 1. Background

To address the short-comings of command-and-control regulations, a different approach is used i.e. market-oriented environmental policies and marketable permit is one of the three tools come under market-oriented environmental policies.

Step 2. Definition

Marketable permit is a type of grant given by government to a firm, allowing the certain quantity of pollution that the firm can emit.

Step 3. Characteristic of marketable permit

1. Firms can buy or sell the marketable permits.
2. The government can sell or provide these permits to pollute free to firms
3. These permits are of shrinkable type i.e. the amount of pollution allowed by a given permit declined with time.

Step 4. Incentives given by marketable permits

Marketable permits gives a firm an incentive to reduce its emissions to reduce the pollution and attain the optimal level of output at the same time with a least expense.