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. The two policies being considered will result in the same amount of pollution reduction:
A)never.
B)always.
C)only if the equilibrium price in the pollution permit market is $250.
D)only if the equilibrium price in the pollution permit market is greater than $250.

Question

Quizplus · Accepted Answer

If the equilibrium price of a pollution permit were $250, firms would emit the same amount of pollution as they would with a $250 tax.

Suppose That a Government Agency Is Trying to Decide Between