With a system of cap and trade, one of the main problems is determining the _____, while with emissions taxes, the main problem is determining the _____.

Question

Quizplus · Accepted Answer

With a cap and trade system, the main challenge is determining the optimal quantity of pollution that should be allowed for a given time period. This involves setting the overall cap on emissions and then distributing or auctioning off permits to individual polluters. On the other hand, with emissions taxes, the goal is to set the optimal tax rate that will incentivize polluters to reduce their emissions to the socially optimal level. This requires estimating the marginal social cost of pollution, which is more difficult to determine than setting a specific quantity limit.

With a System of Cap and Trade, One of the Main