Question 1

The supply curve for permits in a cap-and-trade program is ____________.
A) downward sloping
B) upward sloping
C) a vertical line
D) a horizontal line

Accepted Answer

The supply curve for permits in a cap-and-trade program is a vertical line because the total quantity of permits is fixed by the regulatory authority, making the supply inelastic to price changes.

Question 2

In a cap-and-trade program, permits flow from polluters with relatively ________ abatement cost curves to polluters with relatively ___________ abatement cost curves.
A) low; high
B) high; low
C) steep; flat
D) flat; steep

Accepted Answer

In a cap-and-trade program, permits are initially allocated to polluters based on their historical emissions, which means that polluters with relatively low emissions will receive more permits than polluters with high emissions. Then, as the program progresses, polluters with relatively low abatement costs will use their excess permits to sell to polluters with relatively high abatement costs, thus allowing for a more efficient distribution of emissions reductions. Therefore, the permits flow from polluters with relatively low abatement cost curves (i.e. low costs for reducing emissions) to polluters with relatively high abatement cost curves (i.e. high costs for reducing emissions), making choice A the correct answer.

Question 3

The ________ established an innovative permit-trading scheme for the control of airborne SO₂ emissions in ________. A) 1990 Clean Air Act Amendments; Canada B) 1990 Clean Air Act Amendments; the United States C) Canadian Environmental Protection Act; Canada D) Cross-State Air Pollution Rule; the United States

Accepted Answer

The 1990 Clean Air Act Amendments established an innovative permit-trading scheme for the control of airborne emissions in the United States. Option A refers to the same act but in Canada, Option C refers to a different act in Canada, and Option D refers to a different rule in the United States.

Question 4

A polluter will ______ a permit if the price is ________ its MAC of controlling emissions.
A) sell; less than
B) buy; greater than
C) buy; less than
D) all of the above

Accepted Answer

A polluter will buy a permit if the price is less than its MAC of controlling emissions. This is because it is cheaper for the polluter to buy a permit than to spend money to control emissions. On the other hand, if the price of the permit is greater than the MAC, it would not make economic sense for the polluter to buy it. Selling a permit is also not a likely option for the polluter in this scenario. Therefore, only option C makes sense.

Question 5

Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What is the firm's incentive to engage in R&D to reduce abatement costs to MAC₂? A) (a+b) B) (a+c) C) (a+b+c) D) (a+b+c+d)

Accepted Answer

The answer of Refer to the Figure above. Assume that...

Question 6

Emission rate trading is a trading system designed to achieve more efficient pollution control. It can be described as:
A) a program that issues tradable permits in order to limit aggregate emissions.
B) a program that regulates the base rate at which pollutants are emitted.
C) a program that sets a standard for emission that no firm can exceed.
D) a program that allows new firms to pay existing firms to reduce their emissions below a standard.

Accepted Answer

The answer of Emission rate trading is a trading system...

Question 7

The EPA's CAP program for SO₂ gave producers an incentive to look for cheaper ways of lowering emissions because A) an emissions rate was mandated for firms and the penalties were high. B) increasing scarcity of permits drove their price up. C) offset trading offered large trade gains. D) emissions taxes were enforced with vigor.

Accepted Answer

The increasing scarcity of permits in the EPA's CAP program for SO2 led to higher prices, incentivizing producers to find cheaper ways to reduce emissions to avoid buying expensive permits.

Question 8

Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What is the firm's permit purchase costs? A) (e+d+b) B) (c+d+e) C) (e+d) D) (e)

Accepted Answer

The firm's permit purchase costs include the costs of all permits it needs to buy to cover its emissions. This includes the initial emissions level (e) plus any additional emissions it decides to make beyond its initial allocation, which are represented by the areas (c+d). Thus, the total cost is the sum of these areas: (c+d+e).

Question 9

Cap-and-trade programs require an established set of rules for trading. It is recommended that the regulating agency set the rules and not interfere with the market, because market interference
A) increases transactions costs.
B) causes uncertainty.
C) interferes with the efficient flow of permits.
D) all of the above.

Accepted Answer

Market interference, such as changing the rules or creating uncertainty, can increase transaction costs and disrupt the efficient flow of permits. This can ultimately harm the effectiveness of the cap-and-trade program. Therefore, it is recommended that the regulating agency sets the rules and allows the market to function without interference.

Question 10

One of the ways that initial pollution rights can be allocated in a cap-and-trade program is by equal distribution among all existing sources of a particular effluent. Which of the following is a reason that equal distribution of initial pollution rights among polluters is flawed?
A) Existing firms within an industry vary in size.
B) Firms in different industries may vary in value of output.
C) This method does not reward those who have invested in emissions reductions already.
D) All of the above.

Accepted Answer

A) Existing firms within an industry vary in size, which means that equal distribution of initial pollution rights may not align with the actual amount of emissions each firm produces.
B) Firms in different industries may vary in value of output. Equal distribution of initial pollution rights doesn't take into account factors that affect each industry or firm's capacity to reduce emissions, such as the size, economic value, and technological advantages.
C) This method does not reward those who have invested in emissions reductions already. Firms that have already invested in emissions reductions, may be penalized because they are allocated the same amount of initial pollution rights as a firm that may have done nothing to reduce emissions.

Question 11

A polluter will ________ its emissions and sell its excess permits on the market if the market price of permits is ________ its MAC at its chosen emission level.
A) reduce; less than
B) reduce; greater than
C) increase; less than
D) increase; greater than

Accepted Answer

A polluter will reduce its emissions and sell its excess permits on the market if the market price of permits is greater than its Marginal Abatement Cost (MAC) at its chosen emission level, as this makes reducing emissions and selling permits more profitable than emitting more.

Question 12

Cap-and-trade is a trading system designed to achieve more efficient pollution control. It can be described as:
A) a program that issues tradable permits in order to limit aggregate emissions.
B) a program that regulates the base rate at which pollutants are emitted.
C) a program that sets a standard for emission that no firm can exceed.
D) a program that allows new firms to pay existing firms to reduce their emissions below a standard.

Accepted Answer

Cap-and-trade is a program that issues tradable permits to firms for their emissions, with a total cap on the number of permits available. Firms can buy and sell permits in order to achieve their emission targets, incentivizing more efficient pollution control.

Question 13

The first problem encountered when trying to institute a cap-and-trade program is
A) assigning a regulatory agency to oversee the program.
B) establishing a market for permits.
C) setting the price for permits.
D) the initial distribution of the permits.

Accepted Answer

The first problem encountered when setting up a cap-and-trade system is the initial distribution of the permits, as it involves deciding how many permits to issue and how to allocate them among the participants. This step is crucial for the effectiveness and fairness of the program.

Question 14

The EPA's CAP market allowed firms to use whatever means they found the cheapest to reduce SO₂ emissions A) but required specific technology that had to be used. B) rather than dictating the technology to be used. C) and placed pollution control objectives in the hands of the polluters. D) and sets the price for which discharge permits will be exchanged.

Accepted Answer

The statement mentions that firms were allowed to use whatever means they found cheapest, implying that the EPA did not dictate the technology to be used. Therefore, option B is the best choice. The statement does not mention anything about requiring specific technology, placing pollution control objectives in the hands of polluters, or setting the price for discharge permits.

Question 15

Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What are the firm's abatement costs? A) (a+b) B) (a+b+c) C) (a+b+c+d) D) (e)

Accepted Answer

The firm's abatement costs are represented by the area under the MAC curve up to the level of emissions it has adjusted to, which is the sum of areas (a) and (b).

Question 16

Transferable emission permit schemes provide _______ incentive to invest in R&D to find cheaper methods of reducing emissions as emission taxes that achieve the same level of abatement.
A) a different
B) the same
C) a greater
D) a lower

Accepted Answer

Transferable emission permit schemes provide the same incentive to invest in R&D to find cheaper methods of reducing emissions as emission taxes that achieve the same level of abatement, because both mechanisms make reducing emissions financially beneficial for firms.

Question 17

The EPA's CAP program for _________ was the first large-scale example of a system of transferable emission permits tried in the United States. A) leaded gasoline B) SO₂ C) NO_x D) CO₂

Accepted Answer

The EPA's CAP (Clean Air Act Amendments) program for SO₂ was the first large-scale example of a system of transferable emission permits, known as cap-and-trade, implemented in the United States to address acid rain.

Question 18

The most direct way to accomplish a reduction in the number of permits for a cap-and-trade is
A) initial distribution of permits is dated according to the year in which it may be used, after which a declining set of permits would be issued.
B) regulating agencies could buy permits and retire them.
C) new laws could be adopted periodically to adjust the distribution and number of permits.
D) regulators could request that firms leave the industry.

Accepted Answer

The initial distribution of permits is dated according to the year in which it may be used, after which a declining set of permits would be issued. This would directly reduce the number of permits available in the cap-and-trade system.

Question 19

The EPA program that established an allowable base rate for the amount of lead in the gasoline that oil refineries produced and allowed for the trading of excess allowances is an example of ____________.
A) offset trading
B) emission rate trading
C) carbon offset markets
D) renewable portfolio requirements

Accepted Answer

The EPA program described is an example of emission rate trading, in which a baseline level of emissions is established and the trading of allowances allows for flexibility in meeting those levels. Offset trading and carbon offset markets both involve trading credits for reduced emissions or carbon sequestration, but they are not applicable in this scenario. Renewable portfolio requirements focus on the use of renewable energy sources, which is also not relevant to the EPA program mentioned.

Question 20

Transferable emission permit programs work best if
A) there is asymmetric information between buyers and sellers.
B) many different markets available for buying and selling permits.
C) the permit market is competitive among buyers and sellers.
D) none of the above.

Accepted Answer

Transferable emission permit programs work best if the permit market is competitive among buyers and sellers. This ensures that the price of the permit reflects its true value and encourages efficiency in pollution reduction among firms. Asymmetric information between buyers and sellers can lead to market inefficiencies, and having too few markets available can limit participation and hinder the effectiveness of the program.

Quiz 13: Incentive-Based Strategies: Market Trading Systems

The supply curve for permits in a cap-and-trade program is ____________.

In a cap-and-trade program, permits flow from polluters with relatively abatement cost curves to polluters with relatively ___ abatement cost curves.

The established an innovative permit-trading scheme for the control of airborne SO₂ emissions in .

A polluter will a permit if the price is __ its MAC of controlling emissions.

Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What is the firm's incentive to engage in R&D to reduce abatement costs to MAC₂?

Emission rate trading is a trading system designed to achieve more efficient pollution control. It can be described as:

The EPA's CAP program for SO₂ gave producers an incentive to look for cheaper ways of lowering emissions because

Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What is the firm's permit purchase costs?

Cap-and-trade programs require an established set of rules for trading. It is recommended that the regulating agency set the rules and not interfere with the market, because market interference

One of the ways that initial pollution rights can be allocated in a cap-and-trade program is by equal distribution among all existing sources of a particular effluent. Which of the following is a reason that equal distribution of initial pollution rights among polluters is flawed?

A polluter will its emissions and sell its excess permits on the market if the market price of permits is its MAC at its chosen emission level.

Cap-and-trade is a trading system designed to achieve more efficient pollution control. It can be described as:

The first problem encountered when trying to institute a cap-and-trade program is

The EPA's CAP market allowed firms to use whatever means they found the cheapest to reduce SO₂ emissions

Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What are the firm's abatement costs?

Transferable emission permit schemes provide _______ incentive to invest in R&D to find cheaper methods of reducing emissions as emission taxes that achieve the same level of abatement.

The EPA's CAP program for _________ was the first large-scale example of a system of transferable emission permits tried in the United States.

The most direct way to accomplish a reduction in the number of permits for a cap-and-trade is

The EPA program that established an allowable base rate for the amount of lead in the gasoline that oil refineries produced and allowed for the trading of excess allowances is an example of ____________.

Transferable emission permit programs work best if