Which of the following is true regarding tradable pollution permits and Pigouvian taxes ?
Correct answer: B. Pigouvian taxes and tradable pollution permits create an efficient market for pollution.
- A. All of these answers are true
- B. Pigouvian taxes and tradable pollution permits create an efficient market for pollution.
- C. Tradable pollution permits efficiently reduce pollution only if they are initially distributed to the firms that can regulator pollution at the lowest cost.
- D. To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights.
- E. Pigovian taxes are more likely to reduce pollution to a targeted amount than tradable pollution permits.
Explanation
Both taxes and tradable permits can produce an efficient pollution outcome when properly designed, but permit allocation need not initially favor the lowest-cost reducers because trading reallocates permits. Taxes are generally more likely than permits to achieve a specified pollution price, not necessarily a specified quantity, so option b is the valid statement.
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