Question

Say the government establishes rights to pollute so that without a pollution permit you aren’t allowed to emit pollutants into the air, water, or soil. Firms are allowed to buy and sell these rights. In what way will this correct for an externality?.

Answer 1

A marketable permit program corrects externalities by allowing firms to buy and sell permits that give them the right to emit a certain amount of pollution. This system incentivizes firms to reduce pollution efficiently, as permits can be traded based on the relative costs of pollution reduction.

Step-by-step explanation:

A marketable permit program allows firms to buy and sell permits that give them the right to emit a certain amount of pollution. This system helps correct for externalities by incentivizing firms to reduce pollution. Firms that can reduce pollution at a lower cost can sell their excess permits to firms that find it more expensive to reduce pollution. As a result, the total level of pollution is reduced efficiently.

For example, let's say Company A can easily reduce pollution at a low cost, while Company B finds it more expensive to reduce pollution. Company A can sell its extra pollution permits to Company B, allowing Company B to continue its operations without exceeding the pollution limit. This trading of permits helps allocate pollution reduction efforts to the firms that can achieve it at the lowest cost, resulting in a more efficient reduction of externalities.

Answer 2

The government will profit from the sale of the permits, but it affects people without the ability to get the permit.

Step-by-step explanation:

a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey.