In the following scenario, why should Canada sell pollution permits rather than levying a tax?
Suppose the federal government wants to set a specific limit on methane emissions in Canada to help alleviate global warming.
Which of the following describes why the sale of pollution permits for methane emissions might be a better economic solution for the government than levying a corrective (Pigovian)Tax?
A) If the government doesn't have a good estimate of the demand curve for methane emissions, then can't know the magnitude of the corrective tax that would achieve the desired limit.
B) The cost of a corrective tax would get passed on consumers, whereas pollution permits would avoid this problem.
C) The sale of pollution permits would generate more revenue than a corrective tax.
D) The government would not want to anger voters who like to keep business taxes low.
If you can explain why as well briefly, it would be helpful(Optional)
Thank you. :D
1 Answer | Add Yours
Of the choices given here, A is the best answer.
Both B and D are unlikely to actually happen. There is no reason why the cost of pollution permits would not be passed on to consumers. Similarly, voters who would be angry about the level of taxation on businesses would be just as angry about costs imposed on businesses through pollution permits, which are really just a form of tax. As for C, we have no way of knowing without knowing the price of the pollution permits or the level of the tax.
A is the best answer because pollution permits would be subject to market forces of supply and demand. Those forces would determine the right price for the permits. By contrast, with the tax, the government would have to try to guess on the demand curve and the optimal tax rate. This is very hard to do.
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