Cap and Trade is a system aimed at correcting for externalities by
A) imposing taxes.
B) establishing tradable permits.
C) placing quotas on specific firm's output.
D) limiting exports.

Question

Quizplus · Accepted Answer

Cap and Trade involves establishing a market for tradable permits, also known as emissions allowances. The government sets an overall cap on emissions, and then issues a corresponding number of permits to firms that allow them to emit a certain amount of pollution. Firms that can reduce emissions more cheaply than their allotted allowance can sell their excess permits to other firms that face higher abatement costs. This establishes a market price for pollution that reflects the social cost of emissions and creates incentives for firms to reduce pollution efficiently.

Cap and Trade Is a System Aimed at Correcting for Externalities