When the number of tradable allowances is set equal to the efficient market quantity:
A) it is equivalent to a tax set equal to the level of the external cost.
B) the outcome will be more efficient than a tax on pollution.
C) it is equivalent to a government regulation set equal to the efficient market quantity.
D) the price of the allowances will equal the social cost of pollution.

Question

Quizplus · Accepted Answer

When the number of tradable allowances is set equal to the efficient market quantity, it is equivalent to a tax set equal to the level of the external cost because both approaches aim to internalize the externality by making firms pay for the social cost of pollution.

When the Number of Tradable Allowances Is Set Equal to the Efficient