Question

Under what circumstance is a tradable pollution permit more efficient for economic well-being than a corrective tax?

a) When the government wants to raise revenue.
b) When the pollution is easy to quantify.
c) When the polluters have very similar cost structures.
d) Tradable pollution permits are never more efficient than corrective taxes.

Answer 1

A tradable pollution permit is more efficient than a corrective tax when a limited number of parties are highly interested in trading, such as in industries where specialized permits like lead permits for refineries or sulfur dioxide permits for utilities are involved, and where polluters have diverse cost structures for pollution abatement.

Step-by-step explanation:

The circumstance under which a tradable pollution permit is more efficient for economic well-being than a corrective tax is when a few dozen or a few hundred parties are highly interested in trading. This typically applies to industries like oil refineries or electrical utilities, where permits can be traded among the firms and flexibility is crucial. Markets for pollution permits are especially efficient when polluters have very different cost structures, as they allow firms with lower costs of abatement to abate more and firms with higher costs to buy permits.In contrast, for widespread pollution from sources like car engines or upcycled soda cans, where the number of emitters is massive and there's little interest in trading permits, a pollution tax is usually a more efficient tool. Moreover, the government can generate revenue through the allocation of permits or combine both market-based tools to cover emissions not under a permit.