Question

In terms of economic efficiency in the market for pollution, having the government auction the permits off is distributing them to firms. True or False: If the government chooses to distribute the permits, the allocation of permits among firms matters for efficiency. True False

Answer 1

True, True

Step-by-step explanation:

In terms of economic efficiency in the market for pollution. It does not matter if the government distributes the permits or auctions them off, as long as if firms can sell the permits to each other. The only difference would be that the government could make money if it auctioned the permits off, thus allowing it to reduce taxes, which would help reduce the deadweight loss from taxation in other markets. Some deadweights loss could also occur if firms use resources to lobby for additional permits.

If government chooses to distribute the permits among firms, the firms could sell the permits to each other, this allocation of permits among firms would not matter for efficiency, but affects the distribution of wealth, and those that sold their permits are better off.