Question

Explain how a program of transferable discharge permit works to satisfy the equimarginal principle.

Answer 1

Taxes on emissions occurs as a result of interaction between polluters. Transferable Discharge Permit entities the user and holder to emit pollutant(one unit) over a period of time. The TDP are basically transferable in nature and there exist upper limit on the level of effluent. The principle of equimarginal utility can apply, when permits are traded in different sectors. The market for permits allows the transactions of tradable permits. It does not alter or change the total level of emission.
The selling and buying of permit among polluters leads to the allocation and distribution of emission(total emission) among various polluters in a way that satisfy and maintain the principle of equimarginal utility. The polluter will limit and reduce its emission level and sells the excess permit of emission on the market. If the price prevails in market is equal to or greater than Marginal Abetment Cost, the permit level works under equimarginal principle. The MAC can be regarded as the demand curve for permit(If buying) and supply cure(If selling). The equilibrium level occurs where demand for and supply of permit equates.