When the number of tradeable allowances is set equal to the efficient market quantity:
A) it is equivalent to a tax set equal to the level of the external cost.
B) the outcome will be more efficient than a tax on pollution.
C) it is equivalent to a government regulation set equal to the efficient market quantity.
D) the price of the allowances will equal the social cost of pollution.

Question

Quizplus · Accepted Answer

When the number of tradeable allowances is set equal to the efficient market quantity, it is equivalent to a tax set equal to the level of the external cost because both approaches internalize the externality and lead to the efficient market outcome.

When the Number of Tradeable Allowances Is Set Equal to the Efficient