Suppose a political candidate criticizes a government pollution permit policy that she says lets corporations buy and sell the right to pollute. She argues that our right to breathe and the future of our planet require real regulation instead of this type of government policy. Which of the following describes why most economists would disagree with her statement? 1. A corrective tax would result in a more efficient outcome than either tradable permits or government regulation would. 2.A free market in tradable pollution permits is typically more efficient than government regulation. 3.Clean air is a fundamental right, and government regulation will allow too much pollution. 4.The environment is so important that it should be protected as much as possible, regardless of the cost.
Answer:
Correct option: (2) A free market in tradable pollution permits is typically more efficient than government regulation.
Explanation:
Tradable pollution permits refer to the situation where the government gives the legal right to firms to pollute a certain amount during a given time period (say one year). In a free market, the firms that pollute less than the permitted level can sell their leftover permits to firms that pollute more than their limit.
Other government regulations will not be that effective to control pollution. For example, the government can also tax suppliers of pollution by the amount equal to the external cost of pollution. An external cost is a difference between the social cost and the private cost of pollution. But it is difficult to calculate the exact social cost and external cost of pollution. As a result, the exact amount of tax to be levied can not be calculated.
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