The government can both set the efficient level of output in a market and maximize surplus by correcting for a negative externality by using:
A) a tariff.
B) a subsidy.
C) a tradable allowance.
D) a quota.

Question

Quizplus · Accepted Answer

A tradable allowance system, also known as a cap and trade system, creates a market for pollution permits that limit the total amount of pollution in a given area. By setting a cap on the total amount of pollution allowed and allowing firms to purchase or sell permits, the government can ensure that the efficient level of pollution is reached while also maximizing total surplus. This approach provides an incentive for firms to reduce their pollution output while also allowing some flexibility in meeting the overall pollution target. Tariffs, subsidies, and quotas may also be used to correct for negative externalities, but they are less effective than a tradable allowance system in terms of achieving both efficiency and total surplus maximization.

The Government Can Both Set the Efficient Level of Output