Question

Suppose that the level of sewage is flowing into Lake Michigan is specified by the federal government. Assume that the cities and towns on Lake Michigan are the only polluters. If these same cities and towns trade the rights to pollute among themselves, then this is a system of _____________________.

Answer 1

If the cities and towns on Lake Michigan trade the rights to pollute among themselves, then this is a system of **cap-and-trade**. In a cap-and-trade system, a limit (cap) is set on the total level of pollution allowed, and companies or municipalities can trade (buy and sell) permits that allow them to emit a certain amount of pollution. This system incentivizes reductions in emissions and allows for more cost-effective ways to achieve environmental goals.