Compared to a fixed-percentage reduction regulation,a tax on pollution encourages
A) all firms to reduce pollution by the same percentage.
B) all firms to use the same technology to reduce pollution.
C) firms that can most cheaply reduce pollution to make sizeable reductions.
D) firms that find pollution reduction expensive to pollute even more.
E) economic inefficiency.

Question

Quizplus · Accepted Answer

A tax on pollution provides a monetary incentive for firms to reduce their pollution levels, and as a result, firms that can reduce pollution more cheaply will make larger reductions than those for whom pollution reduction is more expensive. This results in an efficient allocation of resources towards pollution reduction. Unlike a fixed-percentage reduction regulation, a pollution tax does not disadvantage firms that face higher pollution reduction costs, nor does it allow firms with low pollution reduction costs to continue polluting at the same rate.

Compared to a Fixed-Percentage Reduction Regulation,a Tax on Pollution Encourages