One interesting externality regulation method is that of tradable (or marketable) pollution credits. A simplified version of this method lets us examine some of the interesting aspects of this idea.

In our discussions of optimal pollution and pollution taxes we imagined that it would be possible to compute the marginal costs and benefits of externalities. We also acknowledged that it is very difficult, if not impossible, to make these calculations. If we can't obtain the information necessary to determine optimal levels of externalities, can we at least minimize the cost of whatever amount of abatement has been decided upon? Marketable pollution credits may make this possible.

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