Suppose That a Government Agency Is Trying to Decide Between

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. Suppose the regulators chose the permit policy instead of the tax policy. What might explain that decision?

A) Permit auctions raise more revenue than do taxes.
B) The permit policy allows regulators to achieve reduction goals without having detailed knowledge about firms' abatement costs.
C) The permit policy will reduce pollution by more than would the tax policy.
D) Firms prefer the permit policy because it allows them to choose the least-costly reduction technology.