The government prefers a market-based approach to reduce firms' emissions of a toxic gas but wants to make certain that no more than 1,000 cubic yards of the gas are ever emitted in a single day.The most efficient policy under these circumstances is likely to be a system of
A)per-unit taxes on emissions of the gas.
B)per-unit taxes on the goods produced by firms that emit the gas.
C)subsidies to firms that agree not to emit the gas.
D)sales of permits to emit specified quantities of the gas on specified days.

Question

Quizplus · Accepted Answer

A system of sales of permits to emit specified quantities of the gas on specified days, or a cap-and-trade system, would ensure that emissions are kept below the government's desired limit of no more than 1,000 cubic yards in a single day. Firms that emit less than their allocated permits can sell their unused permits to firms that emit more than their allocated permits. This creates an incentive for all firms to reduce their emissions and rewards the most efficient firms with financial benefits. A per-unit tax on emissions (choice A) or goods produced by firms that emit the gas (choice B) would not necessarily keep emissions below the desired limit and could create inefficiencies in production. Subsidies to firms that agree not to emit the gas (choice C) would not create sufficient incentives for firms to reduce their emissions and could be expensive for the government.

The Government Prefers a Market-Based Approach to Reduce Firms' Emissions