Final answer:
Tradable pollution permits allow for a cost-effective and efficient reduction of pollution, with the total quantity declining as firms who reduce pollution at lower costs do so the most.
Step-by-step explanation:
An advantage of using tradable pollution permits is the flexibility it offers in reducing pollution. Regulators set an overall cap on pollution levels but do not need to know the demand for pollution rights. Firms are allocated or can buy a certain number of permits. If a firm wants to emit more pollution, it needs to buy permits from others, whereas firms that can reduce pollution more cheaply can sell their excess permits. This creates a market for pollution rights and ensures that those who can reduce pollution at a lower cost do so, leading to cost-effective and efficient pollution reduction.
Marketable permits offer many benefits. They allow the total quantity of pollution to decline while giving firms the flexibility to buy or sell permits based on their capacity to reduce emissions. This market-based approach can be more advantageous than pollution taxes in certain scenarios, especially when it's impractical to tax numerous small polluters. Policies can also be mixed, allowing the government to combine marketable permits with a pollution tax.