Final answer:
Marketable permits can work as an incentive for firms to improve their technology and reduce their emissions by increasing the price of permits. Firms that are able to reduce their emissions below the permitted level can sell their unused permits to other firms, creating a market-driven approach to reducing pollution.
Step-by-step explanation:
Marketable permits are a type of economic incentive used to reduce pollution. In this case, firms are given permits that allow them to emit a certain amount of pollution. However, these permits become more restrictive over time, requiring firms to reduce their emissions. Firms that are able to reduce their emissions below the permitted level can sell their unused permits to other firms that need them.
Graphically, this can be shown on a supply and demand curve. The supply curve represents the available permits, and the demand curve represents the firms' need for permits. As the permits become more restrictive, the supply curve shifts left, indicating a reduction in available permits. The firms' demand for permits remains the same, resulting in a higher price for the permits.
By increasing the price of permits, firms are incentivized to invest in technology and reduce their emissions to avoid the cost of purchasing additional permits. This creates a market-driven approach to reducing pollution, where firms are encouraged to find the most cost-effective ways to reduce emissions.