Consider a policy that pays firms $100 per unit of pollution that they abate. Wh

Question

Consider a policy that pays firms $100 per unit of pollution that they abate.

Which one of the following statements is true?

a. Firms will prefer this policy to a uniform standard that causes them to reduce pollution by the same amount

b. This policy will yield fixed levels of cleanup even in the face of uncertain changes in firms' abatement cost curves

c. Firms end up receiving payments from the govenment that are less than their total abatement costs

d. The policy is not cost-effective because every firm receives the same payment per unit of pollution.

Explanation / Answer

Solution: The policy is not cost-effective because every firm receives the same payment per unit of pollution.

Explanation: This policy can be optimal when the government knows everything – the costs of abatement for each polluter, the social benefits of abatement, and the technologies available.

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