Question 1

Pollution permit policies achieve an ________ outcome because ________.
A)inefficient; wealthier firms can afford to purchase more permits.
B)efficient; firms that have the lowest cost of reducing pollution will be able to pay more for each permit.
C)inefficient; the supply of permits is set by the government, and so is perfectly inelastic.
D)efficient; firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits.

Accepted Answer

Selling pollution permits promotes efficiency because firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits, so that the reductions in pollution will be accomplished by firms that can do so the most cheaply.

Question 2

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.

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.

Question 3

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.

Accepted Answer

The government can decide how many pollution permits to sell.

Question 4

Suppose you are an economic researcher, and you have access to detailed information about all of the firms in a given geographic area. You would conclude that the pollution reduction policy in that area is efficient if you observe that:
A)all firms produce approximately the same amount of pollution.
B)the cleanest firms are also the most profitable.
C)the marginal cost of reducing pollution is the same for all firms at current emissions levels.
D)all firms currently use the same pollution reduction technology.

Accepted Answer

If all firms have the same marginal cost of pollution abatement, the total cost of pollution abatement will have been minimized.

Quiz 11: Externalities, Property Rights, and the Environment

Pollution permit policies achieve an outcome because .

Suppose you are an economic researcher, and you have access to detailed information about all of the firms in a given geographic area. You would conclude that the pollution reduction policy in that area is efficient if you observe that: