Suppose that a government agency is trying to decide between two pollution reduction policy options.Under the permit option,100 pollution permits would be sold,each allowing emission of one unit of pollution.Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit.Under the pollution tax option,firms would be taxed $250 for each unit of pollution produced.The regulated firms all currently pollute and face varying costs of pollution reduction,though all face increasing marginal costs of pollution reduction.
Suppose the regulators chose the permit policy.What might explain that decision?

Question

Quizplus · Accepted Answer

The permit policy allows the government agency to achieve pollution reduction goals without having detailed knowledge about firms' abatement costs. This is because the policy puts a hard cap on total emissions, ensuring that the pollution reduction target is met regardless of the specific abatement technology used by each firm. In contrast, the pollution tax policy requires detailed knowledge about each firm's marginal abatement cost curve in order to set the optimal tax rate.

Suppose That a Government Agency Is Trying to Decide Between