Why are taxes on pollutants and tradable allowances considered to have similar effects in solving externality problems?
A) The companies who are taxed are also simultaneously subject to the allowances of pollutants.
B) They both reduce pollution of exactly the same types of pollutants.
C) They both bring markets closer to the efficient quantity.
D) Companies can trade the taxes on pollutants just as they trade the allowances on pollutant amounts.

Question

Quizplus · Accepted Answer

Both taxes on pollutants and tradable allowances aim to internalize the external cost of pollution by imposing a cost on firms that produce pollution. This cost incentivizes firms to reduce their pollution output and brings the market closer to the efficient level of pollution. Tradable allowances allow firms to trade their permits, creating a market for pollution. Similarly, a tax on pollutants creates a market for pollution abatement where firms can reduce their tax liability by reducing their pollution output or purchasing allowances from other firms. Therefore, both policies can achieve similar outcomes in terms of reducing pollution and bringing the market closer to the efficient quantity.

Why Are Taxes on Pollutants and Tradable Allowances Considered to Have