In the absence of government action, the private sector will increase emissions up to the point where there is no further marginal benefit. That is, emissions will rise to whatever level is implied by profit-maximization, paying no attention to the effects on the environment.A cap-and-trade system puts a limit on overall emissions, so that emitters have to pay a price for emitting. This price will, as shown in the figure above, equal the marginal benefit of the last unit of emissions allowed.
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