Final answer:
The preference for taxes or permits in pollution regulation depends on the shape of the marginal cost of pollution reduction curve and the marginal cost of damage curve. Option c is correct answer.
Step-by-step explanation:
Understanding the Preference for Taxes or Permits in Pollution Regulation
When considering policies to regulate pollution, it's important to analyze the economic impact of options like taxes or permits. This consideration depends on the relative shape of two crucial curves: the marginal cost of pollution reduction curve and the marginal cost of damage curve. The correct answer to the student's question is (c) Marginal cost of pollution reduction curve and marginal cost of damage curve.
The marginal cost of pollution reduction tends to increase as more pollution is controlled. Initially, firms can implement cheap and easy methods to reduce emissions. However, after the most accessible solutions are utilized, the cost of further reducing pollution grows, since more expensive and complex methods become necessary.
Conversely, the marginal cost of damage from pollution represents the additional cost that each unit of pollution imposes on society, for instance, health problems and environmental degradation. Initially high, these costs tend to decrease as pollution is reduced because the most damaging effects of pollution are mitigated first.
The decision to use taxes or permits depends on how these curves intersect. If there is a high degree of uncertainty about the costs of pollution reduction or damage, permits may allow for a more predictable environmental outcome since they set a cap on total emissions. If the costs are more predictable and stable, taxes may provide a cost-effective solution adjusted to meet the reduction targets.