Some environmentalists have criticized tradable emission allowances on the grounds that they give permit holders a license to pollute. Furthermore, environmentalists argue that those who sell their permits receive a monetary benefit from their

contribution to polluting the environment. Use economic reasoning to evaluate this criticism.

What will be an ideal response?

The criticism ignores one of the central lessons of economics: resources are scarce and trade-offs exist. Resources spent reducing one type of pollution are not available for other uses. Furthermore, the opportunity cost of polluting (using the permit) is the price of the permit. In other words, firms are forced to face the cost of polluting. So although firms receive a monetary benefit from the sale of permits, the scheme gives them the incentive to find the cheapest way to reduce pollution.