In the presence of uncertainty, when control costs that are higher than expected, a
regulatory scheme based on transferable pollution credits can result in a cleanup
costing more than the socially optimal level.

Question

In the presence of uncertainty, when control costs that are higher than expected, a
 regulatory scheme based on transferable pollution credits can result in a cleanup
 costing more than the socially optimal level.

Quizplus · Accepted Answer

In a regulatory scheme based on transferable pollution credits, firms that can reduce pollution more efficiently are able to sell their credits to others who may find it more expensive to achieve the same level of pollution reduction. However, if the control costs turn out to be higher than expected, the price of these credits increases, ultimately resulting in a cleanup that costs more than the socially optimal level. This is because the market price of the credits may not reflect the true cost of pollution reduction, leading to less efficient outcomes.

In the Presence of Uncertainty, When Control Costs That Are