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 produced.The regulated firms all currently pollute and face varying costs of pollution reduction,though all face increasing marginal costs of pollution reduction.
Suppose the permit policy is adopted.A firm will wish to purchase its first permit if the price of that permit is less than or equal to

Question

Quizplus · Accepted Answer

Under the permit option, firms will only be able to emit one unit of pollution if they hold a permit. Therefore, a firm will wish to purchase its first permit if the cost of purchasing that permit is less than or equal to the cost of eliminating its last unit of pollution and operating completely pollution free, which is represented by its marginal cost of pollution reduction. This is because, if the cost of purchasing a permit is higher than the cost of eliminating its last unit of pollution, the firm would choose to eliminate the pollution instead of buying the permit. Therefore, the firm would only choose to buy the permit if the cost is less than or equal to the marginal cost of pollution reduction. Choice C represents this concept.

Suppose That a Government Agency Is Trying to Decide Between