Final answer:
Amsterdam's plan to raise CO2 taxes is an example of a market-based policy, correctly identified as option A. It aims to internalize the cost of pollution, incentivizing firms to reduce emissions or pay the tax. The correct option is A. market-based policy.
Step-by-step explanation:
The city of Amsterdam's consideration of raising taxes on CO2 emissions to combat air pollution is an example of a market-based policy. This means the correct answer to the given question is A. market-based policy. Taxing pollution serves as a market-based incentive. Firms are charged a pollution tax for their emissions, effectively internalizing the cost of the negative externality that they create. The aim is to influence producers to reduce pollution by making it more costly, thereby achieving the socially optimal level of pollution and production.
Taxes such as a carbon tax are flexible and efficient as they incentivize firms with lower abatement costs to undertake abatement activities such as switching to cleaner forms of energy. Those with higher abatement costs who continue to pollute must bear the cost of the tax. Ideally, the tax level should be set to reflect the true societal costs of the pollution emitted, aligning with the marginal social cost (MSC).
Implementing a pollution charge is not without its challenges. It requires accurate information regarding the size of the externality and the abatement costs involved, which can be hard to determine due to potential misinformation from firms. Despite these challenges, pollution taxes remain a pivotal tool in addressing global threats posed by pollution and encouraging environmentally sustainable practices among businesses and individuals.