An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent.
II) The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.
A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

Question

Quizplus · Accepted Answer

Both statements are true and support each other. If a steel firm can easily substitute capital (such as investing in water treatment technology) for waste materials, they will be more effective in reducing their effluent and therefore pay less in fees. This creates an incentive for the firm to invest in cleaner production processes.

An Effluent Fee Is Imposed on a Steel Firm to Reduce