Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Because firms face increasing marginal costs to reduce pollution, the demand curve for pollution permits will be:
A)upward sloping.
B)downward sloping.
C)perfectly inelastic.
D)perfectly elastic.

Question

Quizplus · Accepted Answer

The benefit of a pollution permit is the reduction in costs associated with being able to pollute one more unit. Because of the increasing marginal cost of pollution reduction, this benefit will decline as the firm purchases more permits.

Suppose That a Government Agency Is Trying to Decide Between