Multiple Choice
Which of the following is an example of an external cost?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following statements is NOT true of both pollution permits and corrective taxes?
A
They both provide incentives for firms to reduce pollution.
B
They both guarantee a specific level of pollution reduction.
C
They both aim to internalize the external costs of pollution.
D
They both can generate government revenue.
Verified step by step guidance1
Step 1: Understand the purpose of pollution permits and corrective taxes. Both are market-based instruments designed to address externalities by internalizing the external costs of pollution.
Step 2: Recognize that both pollution permits (also called cap-and-trade systems) and corrective taxes provide incentives for firms to reduce pollution by making pollution costly.
Step 3: Analyze the statement about guaranteeing a specific level of pollution reduction. Pollution permits set a cap on total pollution, thus guaranteeing a pollution level, but corrective taxes set a price on pollution without guaranteeing a specific pollution quantity.
Step 4: Note that both instruments can generate government revenue: corrective taxes generate revenue directly through tax payments, while pollution permits can generate revenue if permits are auctioned rather than given away for free.
Step 5: Conclude that the statement 'They both guarantee a specific level of pollution reduction' is NOT true for both, because only pollution permits guarantee a pollution level, while corrective taxes do not.
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