Answer to Question #73366 in Microeconomics for Raqueal

Question

4. The Regional Clear Air Incentives Market (RECLAIM) program is an emissions trading program for nitrogen oxide NOx) and sulfur oxide (SOx) emissions in Southern California. One early trade of these “pollution” permits was valued at $1.27 million for 1,700 tons of NOx. One element of this program is that the quantity of allowable pollution per permits decreases over time. So for example if a permit allows 1000 tons of NOx emissions in 1994, it may only allow 500 tons of emissions in 2004. Carefully describe the factors that would influence the market value of RECLAIM pollution permits over time. Would you ever expect the market value of permits to fall to zero? Why or why not?

Answer 1

4. The factors that would influence the market value of RECLAIM pollution permits over time are technology development, demand and supply of polluting industry products, government environmental policy etc. We may expect the market value of permits to fall to zero only if the level of technology will make possible production without pollution at lower or equal costs as with pollution.