ACCA Applied Skills · Financial Management · The economic environment for business
A government wants to correct a negative externality caused by pollution from factories, using a market-based approach rather than direct prohibition. Which of the following would be consistent with this approach?
Issuing tradable pollution permits is the market-based approach. It puts a price on emissions, letting firms that cut pollution cheaply sell permits to those who cannot. Output bans are direct regulation, nationalisation is state ownership, and price ceilings do not correct the externality.
- AIssuing tradable pollution permits to factoriesCorrect
- BBanning all factory output above a fixed level
- CNationalising all factories
- DSetting a maximum price for the factories' products
Explanation
Tradable permits use market mechanisms by giving pollution a price, so firms that can cut emissions cheaply sell permits to others. A ban on output is direct regulation, nationalisation is state ownership, and a price ceiling on products does not address the externality.
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