Multiple Choice
Which of the following is an issue related to distribution that is commonly monitored by the government in the context of public solutions to externalities?
1
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7. Externalities
Public Solutions to Externalities
Multiple Choice
What are tradable pollution permits?
A
A government tax levied on each unit of pollution emitted, paid by firms according to their emissions.
B
Non-transferable pollution quotas that limit emissions for firms but cannot be exchanged between firms.
C
Marketable allowances issued by a regulator that give firms the right to emit a specified quantity of pollution and can be bought and sold among firms.
D
Financial subsidies paid to firms for reducing emissions below a mandated baseline.
Verified step by step guidance1
Understand that tradable pollution permits are a market-based approach to controlling pollution by providing economic incentives for reducing emissions.
Recognize that these permits are also called marketable allowances, which means they can be bought and sold among firms, creating a market for pollution rights.
Note that each permit gives the holder the right to emit a specific quantity of pollution, effectively capping total emissions at a regulated level.
Distinguish tradable permits from other regulatory tools such as taxes (which impose a cost per unit of pollution) or non-transferable quotas (which limit emissions but cannot be exchanged).
Conclude that tradable pollution permits encourage firms to reduce emissions cost-effectively by allowing those who can reduce pollution cheaply to sell their excess permits to others.
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