7) The graph below is of a single source of pollution that operates under a

transferable discharge permit policy. The market price of permits is p',

which the firm takes as fixed. The firm is given (for free) either q° or q¹

permits initially.

$

p

MAC

qº

q¹

Emissio

ns

Permits

a. What is the efficient level of emissions for a firm, given p* price of

permits? Indicate it in the graph. [1 point]

b. Use the graph to help explain why the initial allocation of

permits does not affect how many permits the firm chooses to

hold after trading is complete. [2 points]