Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)? I. levy taxes on the coal factory's production of pollutants II. levy taxes on the consumers' consumption of fish III. create a market for tradeable allowances IV. subsidize firms that produce clean fish
A) I and III only
B) II and IV only
C) III and IV only
D) I, III, and IV only

Question

Quizplus · Accepted Answer

Both levying taxes on the coal factory's production of pollutants and creating a market for tradable allowances would incentivize the factory to reduce their pollution output. Levying taxes on consumers' consumption of fish and subsidizing clean fish production would not directly address the source of the pollution and may not be effective in mitigating the negative externality in the short run.

Assume an EPA Official Observes the Following Situation in a Small