Question

Suppose a political candidate criticizes a government pollution permit policy that she says lets corporations buy and sell the right to pollute. She argues that our right to breathe and the future of our planet require real regulation instead of this type of the government policy.  

Which of the following describes why most economics would disagree with her statement?

The environment is so important that it should be protected as much as possible, regardless of the cost.

A free market in tradable pollution permits is typically more efficient than government regulation.

A corrective tax would result in a more efficient outcome than either tradable permits or government regulation would.

Clean air is a fundamental right, and government regulation will allow too much pollution.

Answer 1

Answer is B . A free market in tradable pollution permits is typicall more efficient than government regulations.

In a tax-based policy, a tax is set (usually in the form of a fine) for pollution beyond a certain level.  When the marginal benefits and marginal costs of pollution control are known with certainty, the amount of the tax can be set to the efficient marginal cost of pollution and firms will choose to clean up an amount of pollution that is exactly efficient. In practice, policymakers rarely know the marginal cost of pollution control before policy is formulated.  In this case, a tax-based system makes it necessary to formulate policy based on an estimate of marginal pollution control costs.  If the estimate is not an accurate one, the desired level of pollution control is not achieved.  Determining the appropriate amount of the tax can be a very difficult undertaking.  By simply setting acceptable levels of emissions among polluters, we fail to recognize that costs differ among factories.  For one factory, it may be very inexpensive to reduce pollution emissions at the margin but for the other it may be much more expensive.  Secondly, the cost of regulating emissions from polluters is very high with command and control methods.  In order to set some sort of socially optimal level, information must be obtained about the true cost of emitting. .

Because of these problems, pollution permits are often an attractive alternative to taxes.  Marketable pollution permits get around these problems by perfectly reflecting the firms' willingness to pay and marginal pollution control costs. Under a permit policy, one must first choose the desired level of abatement and create an according number of permits.  Firms are then allowed to trade permits in a profit-maximizing manner, thus finding the minimal cost of pollution control.  Pollution permits also give firms an incentive to develop new technologies aimed at inexpensively reducing pollution.  These permits allow policymakers the ability to rest assured that whatever level of pollution control they choose, the "invisible hand" of the market will let firms to comply at a cost most advantageous to the firms and to society itself.

These increasingly popular market-based pollution permits aim to limit pollution at an optimal cost to industry.