Suppose the EPA issues pollution credits to firms so that a firm must own a credit for each ton of air pollution it generates. Suppose that firms are allowed to buy and sell these credits. If pollution is to be reduced by 50% the EPA can issue credits in number equal to 50% of current levels of pollution.

If firms are allowed to buy and sell these credits, firms with high marginal abatement costs will offer to buy credits from firms with low marginal abatement costs, who should be happy to sell them. Next, we will construct a simple numerical table of marginal abatement costs.

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