Final answer:
The concept of marketable permits demonstrates that such a system is scalable and flexible, allowing it to function effectively for any number of firms by creating a market for pollution reduction. The correct option is a. Yes, because it's scalable and flexible for all firms.
Step-by-step explanation:
The question asks whether a system of marketable permits can work effectively with thousands of firms. Based on the information provided and the concept's application, the correct answer is yes, because it's scalable and flexible for all firms. Market permits are designed to create a market mechanism where firms with lower costs to reduce emissions can sell their excess allowances to firms where reducing emissions is more costly.
This flexibility allows for a scalable approach, which means that it can work with any number of firms, be it four or several thousand, as long as there is a proper regulation and monitoring mechanism in place.
Marketable permits ensure that the total quantity of pollution declines, and the firms that can reduce pollution the least expensively will do so the most. This market-based approach incentivizes firms to innovate and reduce emissions rather than mandating specific reductions for each firm, which may not be the most cost-effective solution. Moreover, new firms entering the market, such as Firm Delta in the given example, can participate by purchasing permits, thus highlighting the system's scalability and flexibility.