Question

To reduce the level of pollution emitted by firms in an industry, the government could use a cap and trade policy or a carbon tax. Which of the following is true?
a. the quanitity of the good sold will fall under either policy but there will be no change in the price of the good
b. the quantity of the good sold will fall with the carbon tax policy but not with the cap and trade policy
c. the price of the good sold will rise under either policy but there will be no change in the level of production
d. the price of the good sold will rise under either policy and there will be a reduction in the level of production
e. the price of the good sold will rise with the carbon tax policy but not with the cap and trade policy

Answer 1

Option D is true, the price of the good sold will rise under either policy and there will be a reduction in the level of production

Explanation:

Carbon-free is an effective way, even though the economy puts a monetary price above it and gives a value to the actual cost. Since the pollutant price is still in place, polluters are motivated to reduce pollution and to decide how far the gasses are produced.

In comparison, the restriction or cap on pollution can be published from industry by the cap-and-trade system. This limit is decreased in many cases after the pollution goal is met. If this is the case, the law requires polluters to buy the remaining quota from others with low emissions and generate more than the allotted quota.

Both methodologies will increase the cost of the good generated because it is distortionary. Production should however be decreased because of the control of pollution.