Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)?
I. levy taxes on the coal factory's production of pollutants
II. levy taxes on the consumers' consumption of fish
III. create a market for tradable allowances
IV. subsidize firms that produce clean fish
A) I and III only
B) II and IV only
C) III and IV only
D) I, III, and IV only

Question

Quizplus · Accepted Answer

Levying taxes on the coal factory's production of pollutants will discourage the factory from releasing harmful pollutants into the river, thus reducing the negative externality. Creating a market for tradable allowances will also encourage firms to reduce pollution, as they can sell unused allowances to other firms. Subsidizing firms that produce clean fish will encourage them to continue producing clean fish, but it does not directly address the source of the pollution. Levying taxes on the consumers' consumption of fish is not an effective solution, as it punishes the consumers who are not responsible for the pollution.

Assume an EPA Official Observes the Following Situation in a Small