Question

What is a marketable permit and what incentive does it provide for a firm to account for external costs?

a. A marketable permit is a government-issued license to pollute, providing an incentive for firms to reduce external costs.

b. A marketable permit is a tradeable right to emit pollutants, providing an incentive for firms to reduce external costs.

c. A marketable permit is a tax on pollution, providing an incentive for firms to reduce external costs.

d. A marketable permit is a subsidy for reducing pollution, providing an incentive for firms to increase external costs.

Answer 1

A marketable permit is a tradeable license that allows firms to emit a specific amount of pollution, with the ability to sell unused portions of the permit providing a financial incentive to reduce emissions and account for external costs.

Step-by-step explanation:

A marketable permit is a tradeable license that allows a firm to emit a certain amount of pollution as part of a marketable permit program like cap-and-trade. These permits are allocated by the government among firms that produce pollutants, and the total number of permits corresponds to an overall pollution cap set by regulatory standards. Firms that have more permits than they need for their own emissions can sell their excess permits to others. This creates a financial incentive for firms to reduce their emissions: the more they reduce, the more permits they can sell.

The incentive provided for a firm to account for external costs is based on the opportunity to profit from selling permits and the cost savings from reducing the amount of pollution they create. Essentially, it encourages firms to internalize the spillover costs of pollution, such as negative externalities affecting third parties, since reducing pollution now has a tangible economic benefit. This aligns a firm's financial interests with environmental objectives.