AP MicroeconomicsEnvironmental Economics
Cap and Trade
Cap and trade is a system that limits total pollution and lets firms buy and sell permits to emit within that cap.
The government sets a cap and issues tradable permits; firms that cut emissions cheaply can sell permits to those that can't. It puts a market price on pollution and achieves a target at the lowest total cost, addressing a negative externality.
Interactive graph
Externalities →
Drag the curves and see it for yourself.
Study module
Public Goods & Externalities →
Full lesson, practice questions, and flashcards.