A Pigovian tax sets the price of pollution while tradable pollution permits set the quantity of pollution.

Question

Quizplus · Accepted Answer

A Pigovian tax is a tax imposed on an economic activity that generates negative externalities, such as pollution. The tax is set at a level that is equal to the marginal cost of the pollution, in order to internalize the external cost and encourage firms to reduce their pollution. Tradable pollution permits, on the other hand, allocate a fixed number of permits that allow firms to emit a certain quantity of pollution. The permits can be bought and sold on a market, allowing firms to trade their permits and reducing the cost of pollution reduction for those firms that can do so most efficiently. Therefore, a Pigovian tax sets the price of pollution, while tradable pollution permits set the quantity of pollution.

A Pigovian Tax Sets the Price of Pollution While Tradable