CA Foundation · Business Economics · Public Finance
Which of the following is a market-based instrument used to correct a negative externality such as industrial emissions?
Tradable pollution permits are a market-based instrument. They cap total emissions while letting firms trade the right to emit, so pollution is reduced where it is cheapest. Bans, direct production and price ceilings are not market-based corrections for externalities.
- ATradable pollution permitsCorrect
- BComplete ban on the product
- CDirect government production of the good
- DPrice ceiling on the polluting product
Explanation
Tradable permits set a cap on total emissions and let firms buy and sell the right to pollute, so the price mechanism allocates reduction efficiently. A ban and direct production are command or provision approaches, and a price ceiling does not address the external cost.
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