A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

Question

Quizplus · Accepted Answer

The sale of transferable rights to emit pollution creates a market for pollution. The firms or individuals who are most willing and able to pay for the right to pollute will purchase the transferable rights, meaning that they will be the ones creating the pollution. This system allows the most efficient allocation of pollution as those who value the right to pollute will pay for it, hence creating less pollution. The funds collected by the government may not be enough to compensate any individuals harmed by the pollution, hence it is not necessarily true for option C. Option A is also not true as there is no indication that those who are least willing and able are the ones creating the pollution. Option D is not true as the new law limits the amount of pollution to 1,000 units per day.

A Government Passes a New Law Allowing Only 1,000 Tons