Which of the following statements is TRUE?

Question

Quizplus · Accepted Answer

Allowing the burden of reducing pollution to vary by industry ensures that the reduction is achieved at a lower cost, as each industry has different costs associated with reducing pollution. This maximizes social surplus by reducing pollution at the lowest cost possible. Mandating a fixed amount of emissions for all firms could result in some firms having to incur high costs to meet the emissions limit, while others could reduce emissions at a lower cost. A system of tradeable allowances creates a market for pollution reduction, where firms with high costs of reducing pollution sell their allowances to firms with lower costs of reducing pollution, resulting in an overall reduction in pollution. Lastly, ignoring the impact of pollution reduction on the profitability of firms ignores the fact that the costs of pollution reduction are ultimately passed on to consumers through higher prices, reducing consumer surplus.

Which of the Following Statements Is TRUE