Which of the following is an advantage of tradable pollution permits?
A)Each firm is allowed to pollute exactly the same amount.
B)Revenue from the sale of permits is greater than revenue from a corrective tax.
C)The initial allocation of permits to firms does not affect the efficiency of the market.
D)Firms will engage in joint research efforts to reduce pollution.

Question

Quizplus · Accepted Answer

The initial allocation of permits to firms does not affect the efficiency of the market as long as the permits are subsequently tradable. This means that firms have an incentive to reduce their pollution levels to below the level of their permits, and can sell any excess permits to other firms who may find it more costly to reduce their own pollution levels. This creates an efficient market for pollution abatement, as firms have an incentive to invest in cost-effective ways to reduce pollution, and those with higher abatement costs are able to buy permits from those with lower abatement costs. Option A is incorrect since each firm is allowed to pollute according to its allocated permits. Option B is incorrect since revenue from a corrective tax would be the same as revenue from the sale of pollution permits if the tax rate is set based on the market price of permits. Option D is not necessarily true and therefore cannot be considered an advantage of tradable pollution permits.

Which of the Following Is an Advantage of Tradable Pollution