Question

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

Short answer

A system of marketable permits can work with thousands of firms, provided there is adequate monitoring, regulation, and infrastructure to support it. Challenges such as monitoring and enforcement, market development, and market power and concentration can be addressed through careful planning and policy design. A well-developed and well-regulated trading platform, robust monitoring and enforcement mechanism, and measures to prevent concentration of permits in a few large firms will ensure the system's effectiveness.

Step-by-step solution

Define Marketable Permits

A marketable permits system refers to a policy in which a government or regulatory authority sets a limit on the total amount of a certain pollutant that can be emitted and then divides this total limit into permits, which are allocated to firms. Firms can then trade these permits, buying and selling them depending on their individual needs to emit pollutants. The idea is that this creates a market for pollution rights, incentivizing firms to reduce their emissions and allowing them to do so in a cost-effective manner.

Analyze Factors Affecting the System's Effectiveness

Several factors can affect the effectiveness of a marketable permits system, such as monitoring and enforcement, the number of participating firms, and the total allowable pollution levels. In the context of thousands of firms, the factors that could potentially pose challenges include: 1. Monitoring and enforcement: With a larger number of firms, it may become difficult for regulatory authorities to monitor emissions and ensure compliance with the system. 2. Market development: A system involving thousands of firms would require a well-established trading platform and considerable administrative support for trading permits. 3. Market power and concentration: With a large number of firms involved, the distribution of permits and their subsequent trading might lead to market concentration and dominance by certain firms, raising concerns about equity and tradability.

Determine if Marketable Permits Can Work with Thousands of Firms

Marketable permits can work with thousands of firms, but there must be sound infrastructure and regulatory support in place. To make the system effective: 1. Regulatory authorities need to establish a robust monitoring and enforcement mechanism to ensure compliance among the large number of participating firms. 2. A well-developed and well-regulated trading platform must be put in place to facilitate the trading of permits. 3. Measures should be taken to prevent the concentration of permits in a few large firms, ensuring fair access and tradability for all participating firms. To summarize, a system of marketable permits can work with thousands of firms, provided there is adequate monitoring, regulation, and infrastructure to support it. While there may be challenges in scaling the system to a larger number of firms, they can be addressed through careful planning and policy design.