Question

Text questions By some water there are two factories, A and B, that pollute. The cost of reducing pollution at factory A is higher than at factory B, but the government does not know what the cost is. The pollution at each factory amounts to 100 tonnes per year. The government wants to reduce pollution by 100 tonnes a year. Which of the following is wrong? Choose one: a. By allocating pollution permits, it is possible to ensure that pollution is contracted as much as the government aims. b. The government could benefit from the sale of pollution permits. c. It could be impractical for each factory to reduce pollution equally. d. It may be more cost-effective to allow factory B to pollute but to allow factory A to pollute fully. e. Governments always know how much to tax companies to reduce pollution by exactly 100 tonnes.

Answer 1

Ans) To correct the negative externality government can impose tradable pollution permits. Government implements tradable pollution permits when it does not know the right amount for tax. Government simply puts the limit on pollution level and the demand automatically determines the price of pollution. Goverment can achieve whatever target it wants to by setting the total amount of pollution.

Asking all the firms to reduce the level of pollution from same amount is not right. So the government allows tradable permits. The firm which has high cost of reducing the pollution, will buy some pollution right from the firm who has less cost of reducing it. Therefore it can benefit both the firms.

Option e is wrong.