As Firm 2 buys credits it reduces abatement and its marginal
costs fall, as Firm 1 sells credits it has to engage in more abatement
and its marginal costs rise. As long as the marginal costs are
different the firms have an incentive to trade. In this case,
the firms should trade until Firm 1 is abating 80% of its pollution
and Firm 2 is abating 20% at which point marginal costs are equal
and there is no further incentive to buy and sell.
|
| Firm 1 % Abatement |
MCA |
Firm 2 % Abatement |
MCA |
| 10 |
10 |
10 |
70 |
| 20 |
20 |
20 |
80 |
| 30 |
30 |
30 |
90 |
| 40 |
40 |
40 |
100 |
| 50 |
50 |
50 |
110 |
| 60 |
60 |
60 |
120 |
| 70 |
70 |
70 |
130 |
| 80 |
80 |
80 |
140 |
| 90 |
90 |
90 |
150 |
| 100 |
100 |
100 |
160 |
|