Question

Suppose a political candidate criticizes a government pollution permit policy that she says lets corporations buy and sell the right to pollute. She suggests 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 economist would disagree with her statement?a) The environment is so important that it should be protected as much as possible regardless of the costb) A free market in tradable permits is typically more efficient that government regulationc) A corrective tax would result in a more efficient outcome than either tradable permits or government regulation wouldd) Clean air is a fundamental right, and government regulation will allow too much pollution

Answer 1

Answer:

b) A free market in tradable permits is typically more efficient that government regulation

Explanation:

• When companies are forced to buy rights to pollute, they are paying a cost for the pollution they create. If they pollute more, they will end paying more for that pollution. (demand of rights to pollute)

• On the other hand, companies that pollute almost nothing  can sell rights to pullute saving money: this will create a benefit for companies who take care of environment. (supply of rights to pollute)
• Then, there will be a market of rights to pullute, where some companies will sell and others will buy rights to pullute. In this market, the price of rights to pollute will be determined efficiently.
• Because the production of absolutely every good or service sold in our economy implies pollution, there is a cost society is willing to pay in terms of pollution to get the goods and services it consumes. For example, I am willing to keep buying soda, besides I now for sure its production has certain negative effects on environment. I demand the product, therefore the company (that pollutes) has incentives to keep selling the product.
• The cost we are willing to pay to keep consuming goods will be related to the demand and supply of rights to pollute : companies whose producs are more demanded (by us!) would buy more rights to pollute when neccesary, and companies whose products are not that demanded will buy less rights to pollute, transmiting this results to prices.
• Then, pollution rights became an efficient way of assigning a price to pollution.