Question

9. Which of the following is a difference between corrective taxes and tradable pollution permits?

	a.	Corrective taxes are a market-based solution while tradable pollution permits are a command-and-control policy.
	b.	With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution.
	c.	With corrective taxes firms pay for pollution; with tradable pollution permits firms do not.
	d.	Corrective taxes internalize the pollution externality while tradable pollution permits do not.

Answer 1

Option B

• Corrective taxes are those taxes that are imposed on various goods and services that generate negative externalities.
• These penalty taxes are imposed by the government to discourage them from producing more output and creating externalities like pollution.
• The tradable pollution permits are the legal rights given to an industry which provides them with incentives to pollute a certain amount for a fixed time.
• The prices of pollution under the tradable pollution permits are determined based on the demand to pollute and the supply of permits.