Final answer:
The incorrect statement is 'Firms that have a high marginal abatement cost sell pollution permits' because such firms are more likely to buy permits, while firms with low marginal abatement costs may sell their excess permits.
Step-by-step explanation:
The statement that is incorrect is: Firms that have a high marginal abatement cost sell pollution permits. In a cap-and-trade system, generally firms with lower marginal abatement costs would more likely sell permits because it is cheaper for them to reduce pollution than to pay for permits. On the other hand, firms with high marginal abatement costs would find it more cost-effective to buy permits rather than to reduce their own emissions.
A cap is indeed an upper limit, which sets the maximum level of pollution allowed in a cap-and-trade system. A cap can be seen as a pollution quota as it specifies the total amount of pollution permitted. Lastly, it is true that a government must estimate the efficient quantity of pollution and then allocate the cap across firms, with the ability for firms to trade in a market for pollution permits. The government's role includes determining the overall quantity of pollution and allocating permits, which can be either sold or given to the firms.