Question

A system of cap-and-trade is used to reduce acid rain caused by emissions from electric power utilities. Which of the following statements is true?

A) Market forces determine both the demand for pollution permits and their supply.
B) Public choice determines both the demand for pollution permits and their supply.
C) Market forces determine the demand for pollution permits, and property rights determine their supply.
D) Property rights determine the demand for pollution permits, and the government determines their supply.
E) Market forces determine the demand for marketable permits, and the government determines their supply.

Answer 1

The correct statement is that market forces determine the demand for pollution permits, and property rights determine their supply in a cap-and-trade system.

Step-by-step explanation:

The correct statement is option C) Market forces determine the demand for pollution permits, and property rights determine their supply.

The system of cap-and-trade works by setting a limit or cap on the quantity of pollution that can be emitted by power utilities. These utilities are then required to have pollution permits to cover their emissions. Market forces determine the demand for these pollution permits, as companies that emit more pollution will need to purchase more permits. On the other hand, property rights determine the supply of permits, as they can be issued or allocated to power utilities based on their historical emissions or through auctions.